In today’s age, the cost of living is constantly increasing, and this often affects salaried individuals to a high extent, as most of their income is used to maintain a certain level of comfortable lifestyle. Even with money saved from a regular income source along with any associated investments, it might be difficult to sustain over time amidst mounting financial requirements and the high possibility of emergency events occurring.
In this situation, it’s always a good idea to have a second source of income, and what better than generating it via mutual fund investments in the form of Systematic Withdrawal Plans (SWPs). These are nothing but a structured approach towards withdrawing money from an individual’s investment portfolio, which can further supplement the primary income source.
Scroll down to understand in this latest blog how SWPs work, their benefits, and key things to keep in mind while choosing specific plans for the same.
What are Systematic Withdrawal Plans?
Mutual fund investments might be a safe and secure way of wealth generation, but they also entail using the money saved in a secure and thoughtful manner. One of the ways by which this is possible is via Systematic Withdrawal Plans (SWPs). These plans are nothing, but a facility offered by mutual fund advisors that allows investors to withdraw a fixed amount from their investment portfolio at regular intervals. This could be monthly, quarterly, or annually, depending on an investor’s financial needs. The withdrawn amount can also be easily credited to the investors’ bank accounts upon requirement in minimal time.
Advantages of Availing Systematic Withdrawal Plans
SWPs provide several advantages, both from short-term and long-term perspectives. Firstly, they provide a regular and consistent income stream. This can be highly useful during events such as retirements, spending on weddings, education and similar requirements, and any other related financial obligations. Another key advantage for investors is the tax efficiency derived. The tax implications of SWPs using SWP Calculator can be beneficial, as the withdrawal is considered as capital gains and not regular income. However, it's essential to consult with a tax advisor for personalized guidance.
Thirdly, it becomes easier to manage an investment portfolio by systematically withdrawing funds. This is possible as investors can prevent withdrawal of large lump sum amounts that might impact the investment corpus. And lastly, SWPs offer immense flexibility in terms of withdrawal amount, thus safeguarding the frequency of savings, in addition to maintaining many investment options open to choose from.
The Correct Procedure for Choosing the Right Type of SWP
There are innumerable types of SWPs out there in the market, and their compatibility with investors really depends on various aspects. In other words, there is no one-size-fits-all, and hence it is important for Mutual Fund Distributors to make their clients understand the best way to choose a systematic withdrawal plan that suits the latter’s financial goals and expectations.
1. Investment Objective
Clearly define your financial goals to determine the appropriate withdrawal amount and frequency.
2. Fund Selection
Choose a fund with a steady dividend or distribution history. Diversification across different funds can help manage risk.
3. Withdrawal Amount
Calculate the required withdrawal amount based on your income needs and investment corpus.
4. Market Conditions
Be aware of market fluctuations and adjust your withdrawal amount accordingly.
5. Tax Implications
Understand the tax implications of SWPs and consult with a tax advisor for personalized guidance.
A bonus tip in this context would be the fact that while SWPs offer a convenient way to generate income and its liquidation, it is essential to cross-compare this strategy with other wealth generation options. Some of these are fixed deposits, rental income, remuneration from part-time jobs, etc. Each option has its own advantages, and it really comes down to key factors such as returns, liquidity, and tax implications when making any financial decisions.
Potential Challenges and Considerations
Like any other wealth generation and investment strategies, adopting systematic withdrawal plans are not free from their own hurdles. For example, a key challenge here is that SWPs are highly subject to market fluctuations. During market downturns, the withdrawal amount might exceed the plan’s dividend and distribution numbers, which further affects the principal amount calculated. Unnecessary tax implications can be witnessed as well, wherein long-term goals might not be within an expected timeframe.
Inflation is another prime challenge that needs to be considered. Inflation dramatically affects purchasing power. In this case, there might be monetary uncertainty that is directly related to how high the inflation rate is present. It is thus imperative for investors to adjust their withdrawal amounts, so that they can maintain a desired standard of living.
SWPs can be a valuable tool for generating a second source of income. By carefully considering the financial goals, risk tolerance and market conditions, investors can make informed decisions about implementing an SWP strategy. However, it's essential for them to consult with a financial advisor to create a comprehensive retirement plan. And some of the best financial advisors are the mutual fund distributors or MFDs, who can guide the former properly.