What is a Systematic Withdrawal Plan (SWP)?
While considering any vehicle for investment today investors look for one main thing. This is a priority for any investor, and the higher it is the better. The factor that all investors search for in the best investment vehicle is the return on investment they may receive. With interest rates in banks at all-time lows, and volatility in stock markets, some investors, those who are risk-averse especially, look for plans with reasonable returns. A systematic withdrawal plan or an SWP offers investors who want a regular income a good system of investment. Investors may decide to opt for such a plan after they calculate returns they may receive by using an online tool, an SWP calculator.
A systematic withdrawal plan lets an investor withdraw a variable or fixed amount of capital each month, quarter, or year. It is possible for any investor to have cash flows that are tailor-made to suit them. This way, you can invest in any systematic withdrawal plan according to your unique financial goals and reach them with ease. An SWP calculator can go a long way in aiding you to decide which SWP you should invest in based on your individual requirements.
An SWP in Mutual Funds
Investors have a huge choice in opting for a variety of investments to gain returns. From risky stocks to careful fixed deposits, investors can choose plans and financial instruments, and products to match their needs and personalities. Many investors, both seniors and young wish to have regular flows of cash, either to reinvest or to meet future expense requirements. A systematic withdrawal plan can meet regular cash flow requirements and can build capital while doing so. Apart from this, you can choose the best SWP for you with the help of an online SWP calculator available at most online portals of financial companies and banks.
The primary variable to consider when going in for an SWP is that it is a mode of investment in mutual funds. So, what is a systematic withdrawal plan with a mutual fund? Well, an SWP is an investment plan which invests your capital in a mutual fund, but lets you make periodic fixed amount withdrawals. Investors are permitted to select the date in a month, a quarter, or a year when withdrawals can be made. Amounts are then automatically credited to any investor’s bank account on the prescribed day. While using an SWP calculator online, the key aspect to consider is how much you invest and how your units in a mutual fund get redeemed.
Things to Consider Before Using an SWP Calculator
Before you use any SWP calculator, you should have some idea of the mutual fund you are investing in and what the future value of your investment may be. Since you are, in effect, investing in a mutual fund scheme, you may be investing in the markets in equity or debt mutual funds, or in a blend of both. Hence, when you use a mutual fund SWP calculator, you must consider what kind of mutual fund the SWP is investing in. This is the only way you can know your projected returns (in terms of interest rates based on the past performance of the fund).
Consider that Mutual Fund Unit Balance Reduces
When you know how an SWP works, you will be aware of how to use an SWP calculator to get the most out of it. When you invest in an SWP with a mutual fund, you are allocated units of the fund, based on the amount you invest. The regular income (cash flow) that you receive as your SWP translates to the number of units that are redeemed. This is dependent on the net asset value that is present on the date of withdrawal of your units. If you are still confused, you will understand this better with the following example:
Let’s assume an investor makes a lump sum investment of Rs. 10 lakh via an SWP in a mutual fund. The buying NAV is at Rs. 20. This means that 50,000 units are allotted to the investor. After a year, since commencing the investment, the investor begins an SWP of Rs. 6,000 each month. If, in the first month of starting the SWP, the NAV has risen to 22, around 272 units have to be redeemed in order for the asset management company to give Rs. 6,000 to the investor. The balance units (left over in the fund) will reduce. In the event of the NAV increasing every month, the number of units will reduce. Hence, while using an SWP calculator, you can find out how much your balance may reduce if an assumed amount of the NAV increases. Similarly, the SIP calculator may tell you how much your unit value may increase if the NAV tends to appreciate at a higher percentage than the rate of withdrawal.
The Benefits of the SWP Calculator
The SWP calculator is easy to use and most senior citizens do not find online calculators cumbersome. It is simple to set amounts to withdraw every month and know your maturity amount. By filling in your SWP tenure, your expected return, and the investment amount, you can calculate how much of an investment you need to make. Consider entering different values so you are aware of how much of an expected ideal sum you are assured of receiving on a monthly basis.