What is Systematic Withdrawal and how does compounding work in SWP?
SWP is the exact opposite of an SIP.
SIP stands for Systematic Investment Plan.
If you set up an SIP in a mutual fund, a fixed amount (decided by you) gets invested in a mutual fund of your choice every month.
You can cancel an SIP any time.
SWP stands for Systematic Withdrawal Plan
Like in the case of an SIP, you can set the amount you want to withdraw every month from a mutual fund you have chosen.
SWP is a good way to take out money from a mutual fund over a period of time instead of in one go.
It averages out the returns and prevents single day market ups and downs from affecting your returns.
When should a person start a SWP?
A Systematic Withdrawal Plan (SWP) is a facility provided by mutual funds, where an investor can withdraw a fixed amount of money at predetermined intervals from their investment.
When a person should start an SWP depends on their individual financial goals and circumstances. Generally, SWPs are suitable for those who have accumulated a substantial corpus of savings in mutual funds and want to generate a regular stream of income from their investments.
Here are some scenarios when a person may consider starting an SWP:
After retirement: Many people use SWPs as a source of regular income after they retire. They can withdraw a fixed amount every month or quarter, which helps them manage their expenses.
Need for regular income: If a person needs a regular income for any reason, such as to pay for their child's education, they can start an SWP.
Volatility in the markets: If a person wants to mitigate the impact of market volatility on their investment, they can start an SWP. By withdrawing a fixed amount regularly, they can avoid selling their investments during a market downturn.
Diversification: If a person wants to diversify their investment portfolio, they can invest in mutual funds and start an SWP to generate regular income.
Tax planning: If a person wants to manage their tax liability, they can start an SWP. By withdrawing a fixed amount, they can ensure that their tax liability is spread out over several years.
Overall, a person should evaluate their financial goals and circumstances before starting an SWP. It is advisable to consult a financial advisor to determine if an SWP is suitable for their needs.
