The Systematic Investment Plan, or SIP, has got tremendous traction in country. Recently, an article in Financial Express noted that the total amount collected through the SIP route in June 2017 was Rs 4,744 crores, a growth just shy of 2½ times in over three years, from Rs 1,950 crore collected in April 2014.
What is not as popular is the Systematic Withdrawal Plan, or SWP, which is also a very useful method to deal with fund investments. However, here we look at what an SWP is not.
A SWP is not a STP
A SWP is a facility that allows an investor to withdraw money from an existing mutual fund at predetermined intervals. It allows you to systematically withdraw money out of your mutual fund on a regular basis (fortnightly, monthly, quarterly). At the set, predetermined date, units from your fund are sold and the money is sent to your bank account.
A Systematic Transfer Plan, or STP, allows you to transfer money from one fund to another in a periodic and disciplined fashion. For example, if you wish to invest in the stock market via an equity fund, but want to do is systematically and not at one go, then the STP comes in handy. You can park the bulk amount in a debt fund and decide on the fixed amount that be systematically transferred to the equity fund every month. The money will earn you more in a debt fund than a savings account. However, this works best if the amount parked is a substantial amount.
The prime role of the SWP is to generate an additional cash flow without the need for liquidating your entire investment. The prime role of STP is to gradually alter your asset allocation. Move money from debt funds into equity or, if you are nearing retirement, move money from equity funds into debt.
A SWP is not a MIP
The Monthly Income Plan, or MIP, is a debt-oriented hybrid fund with marginal exposure to equity that generally ranges from 10% to 25%. The SWP is not a product. It is merely a facility that allows for disciplined withdrawals from a mutual fund – it could be any fund; equity, debt or hybrid. At the set, predetermined date, units from your fund are sold and the money is sent to your bank account.
The ‘monthly income plan’ does not guarantee a monthly income by way of dividends. Dividends are given to the investor depending on the fund’s ability to generate returns. On the other hand, an SWP will assure you of a cash flow on the predetermined date.
A SWP is not always a great option
Do not opt for a SWP when you have a regular cash flow. In fact, during such times, you must opt for a systematic investment plan, or SIP. This is the time you should be putting your money to work to attain your goal of wealth creation.
Retirement is the best time to opt for a SWP. It is during this phase that you no longer earn a regular monthly paycheck, which means that the money has to come from somewhere else. This is where the SWP from your mutual fund will help you grow your money as well as obtain an outflow.
Also Read:
3 basic questions on SWP answered
How the SWP turns your fund into a retirement paycheck
MIP or SWP: Which is better?
