About Systematic Withdrawal Plan. Systematic Withdrawal Plan is the opposite of Systematic Investment Plan. In Systematic Investment Plan, you invest in a mutual fund of your choice at a fixed amount and a fixed interval, which enables you to deposit a large amount. In Systematic Withdrawal Plan, you first invest a large amount and from which you keep withdrawing some money at a fixed interval.
In this way, you can get a regular stream of income, i.e., a regular stream of income. Systematic Withdrawals can be done with Debt, Equity or Hybrid Funds. The fixed interval is generally monthly or tri-monthly, but if you want, you can keep it once or twice a year.
There are two types of Systematic Withdrawal Plan.
One is Fixed Amount, and the other is Capital Appreciation. In Fixed Amount, you keep withdrawing a fixed amount at a fixed interval from your mutual fund. No matter what the returns of your mutual fund are. In Capital Appreciation, the returns your mutual fund earns on your basic investment are credited to your bank account every month. an example to understand the Fixed Amount. Suppose you are retiring, and you have Rs. 1 crore at the time of retirement. You have invested it in such a place from where you are getting 10% returns annually. Your monthly expense is Rs 60,000. You should increase your withdrawals according to the rate of inflation, so that your expenses run smoothly. Let’s assume that the rate of inflation was 8% annually during your withdrawals. So, if you increase the withdrawal rate of the month by 0.67% And the first withdrawal is of Rs 60,000 in September 2023, and increase it by 0.67% every month, your investment can cover your expenses by January 2040.
If you use the Fixed Option in the Systematic Withdrawal Plan, and your withdrawal is less than your return. An example. My first year’s return is Rs.10 lakhs but my withdrawal is Rs 7.2 lakh. So, the remaining amount is invested, and it is useful for me in the future. This increases my withdrawal duration. In Capital Appreciation, all the returns that I am earning in my investment are credited in my bank account. Here, we are not taking the rate of inflation into account. Remember that where your investment is in equity, returns are not guaranteed. Hence, the amount credited in your bank account will not be constant.
The uses of the Systematic Withdrawal Plan.
As I mentioned with example, the best use of the Systematic Withdrawal Plan is to manage your expenses, during the days of retirement. As the Systematic Withdrawal Plan has a structure, it can be used for two more things.
The fist use is if you want to go on a long holiday for some reason. If you have a large investment amount and you want to manage your monthly expenses during the holidays, then you can use the Systematic Withdrawal Plan. The second use is for businessmen and professionals whose monthly income is not regular. They keep getting income in lump sum. They can invest their lump sum amount and with the help of the Systematic Withdrawal Plan, they can manage their monthly expenses which are fixed.
The benefits of the Systematic Withdrawal Plan.
As I mentioned till now, the Systematic Withdrawal Plan provides you with a fixed source of income, i.e. a regular stream of income without taking out the entire investment. That is, you take out the required amount and the rest will always be invested. Systematic Withdrawal Plans are mostly advised in Balanced Funds for retirement. This is why their returns are good. Many people use fixed income options like, Fixed Deposit, Senior Citizen Saving Scheme, Post Office Monthly Income Scheme etc. for their retirement income. But the post-tax returns of these options are below the level of inflation. You cannot use the monthly income plans, or the dividend option of other mutual funds like a regular stream of income. Because dividends are not guaranteed and those that are available are not that sizable. The third benefit of the Systematic Withdrawal Plan is, that Just like you invest money at every level of the market in the Systematic Investment Plan, and your investment gets an average investment price, Similarly, in the Systematic Withdrawal Plan, you withdraw money at every level of the market, and because of this, your overall withdrawal is at an average price.
Some important things about the Systematic Withdrawal Plan.
You cannot make a systematic withdrawal and systematic investment in the same fund. As we saw in our example, with the rate of inflation, you should increase your withdrawals. Remember, the tax treatment for every withdrawal will be like a normal withdrawal. So, if you want to use equity or equity-oriented hybrid funds for systematic withdrawal, it is better to invest in them a year before the withdrawal so that, you do not have to pay any tax on the withdrawals after a year. If you want to use systematic withdrawal in debt mutual funds, then if you invest three years before the withdrawal, then you will be able to take the benefit of indexation on the withdrawals after three years. If you want to use the Systematic Withdrawal Plan for a few months to three years, then use liquid funds for withdrawals for six months. If you want to withdraw for a year, then you can use Ultra Short-Term Funds. If you want to withdraw for three years, then you can use Short Term Funds. Because for an investment below three years, equity funds are volatile. The last important thing is that if you have a systematic withdrawal plan, then a large amount of your money is invested in the fund. And for this reason, you should monitor the performance of the fund.
So, friends, in this Blog, we saw what systematic withdrawal plans are, their benefits, their uses, their types and some points that we should know about the systematic withdrawal plan. I hope that through this Blog, I have been able to give you a lot of information about the systematic withdrawal plan.
If you have any questions, you can ask us in the comment section below. Till then, happy investing!
