Just like systematic investing can average out the cost of investments in the long run, systematic withdrawal can ensure you get an average value for your investments at the time of selling. While most investors know about systematic investment plans (SIPs) of mutual funds that can help you save regularly, few know about systematic withdrawal plans (SWPs).
SWPs can help you get regular income over a period of time. They can also help you switch from one asset class to another, when you want an average value. Here are three scenarios in which SWPs can help you.
When people retire from jobs they get a fixed lump sum amount, gratuity, others. Roshni Nayak, a Securities and Exchange Board of India-registered investment advisor (Sebi RIA), says that anyone who has got a huge lump sum amount on hand and does not need the money in one go can invest in mutual funds and then withdraw in a staggered manner.
SWPs also help the retired withdraw regular income. “SWP option in mutual funds can be best used by retirees who need a regular cash inflow every month for their sustenance. SWPs are best done from an asset class which is not very volatile in nature like low-risk debt mutual funds,” she adds.
Kartik Parekh, a Sebi RIA, says SWPs can also help plan out how you want to spend your inheritance.
Often, people tend to spend inheritance money at one go, whether it is to buy a house or fund children’s education or others. However, many use inheritance money to provide for a regular income. SWPs can help sort that out.
“Whether to do it or not depends upon the investor’s circumstances and his personality. Some investors may prefer to buy property with their inheritance money and then earn some rental or other income. Some investors may buy aspirational goods with this money. Some may do a bank FD only. But for those investors who wish to invest in equity or fixed income or debt mutual funds, SWP is a good option. This will not disturb their main inheritance corpus heavily and help them with a regular income,” he adds.
A lot of people have recurring expenses such as providing for their parents or children’s needs every month. SWPs can help meet these expenses.
Rohit Pisipati, a Sebi RIA, says another way in which SWPs could be used is to fund children’s tuition fees or hostel expenses etc. “This will help take care of some expenses of the children, be it higher studies, pocket money, or any other incidental expenses until they get a job,” says Pisipati.
“Working children can use this option for their parents. If they wish to give them a fixed sum every month and have some reasonable amount on hand, the SWP option can work. The SWP option in mutual funds needs to be determined diligently taking into consideration the frequency of withdrawal (when you need the money) and the withdrawal rate (how much money do you need),” says Nayak.
