Withdrawal Plan Systematic (SWP) - Understanding Its Nature and Functioning

Withdrawal Plan Systematic (SWP) - Understanding Its Nature and Functioning

A Systematic Withdrawal Plan (SWP) is an investment strategy that allows individuals to withdraw a fixed amount periodically from their mutual fund investments. This approach offers several benefits, making it an attractive option for those seeking regular income and growth potential.

Unlike a Fixed Deposit (FD), an SWP involves investing a lump sum in mutual funds and then systematically withdrawing a fixed amount regularly. This approach allows the remaining corpus to potentially grow over time with market-linked returns. In contrast, FDs offer stable but fixed returns, albeit with minimal risk.

One of the main advantages of an SWP is that it provides a steady income stream, especially useful for retirees. The growth of SWP depends on the performance of the underlying investments of the selected fund, which means it can offer higher returns but with inherent market risk.

SWPs provide flexibility and liquidity since mutual fund units can be redeemed regularly as per the withdrawal schedule, and the investor can modify the withdrawal amount or stop the plan. FDs, on the other hand, have lower liquidity, and premature withdrawal often involves penalties.

Choosing between SWP or FD depends on one's investment objective and risk tolerance. If you want to earn a fixed return on your investment without taking the risk of market volatility, then FD is a better option. However, if you are willing to take market-related risks and wish to withdraw a regular amount from your investment, SWP could be a suitable choice.

To set up an SWP, you first identify a mutual fund scheme, open an investment account, and select the investment mode (either SIP or lumpsum). You then instruct the fund house to withdraw a fixed amount of money at regular intervals and transfer it to your bank account.

Another advantage of SWP is that it allows you to avoid selling all your investments at once, which can be risky if the market is performing poorly. Additionally, SWP allows you to avoid the urge to time your exit, which can be challenging and risky.

SWP can be a powerful tool for generating income from your savings, especially if you are retired or no longer working. It can be one of the options you may consider for pension income if you are retiring in the coming years and have not invested in any retirement savings scheme.

Investors are not required to pay any tax deducted at source (TDS) on the funds received through an SWP. This makes it an attractive option for those seeking tax efficiency in their investment strategies.

In summary, an SWP is a market-linked, flexible, and strategic withdrawal approach from mutual funds designed to provide regular income and growth potential, while an FD is a fixed-return, low-risk deposit with predictable but generally lower returns. The choice depends on the investor’s risk appetite, need for liquidity, income requirements, and investment horizon.

Mutual funds can be a part of one's personal-finance strategy, and an SWP, being an investment strategy for periodic withdrawal from mutual funds, can offer both regular income and growth potential. When compared to Fixed Deposits, an SWP provides higher returns with market-linked risks but allows for flexibility and liquidity, while FDs offer stable but fixed returns with minimal risk and lower liquidity.

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