A Systematic Withdrawal Plan (SWP) allows you to withdraw a fixed sum of money at fixed intervals from a mutual fund scheme. We have discussed SWP in our previous articles in detail. SWP can be used to create a regular source of income or to fulfil a certain purpose like meeting children’s education fees or retirement income. SWP can be used to meet fixed term or long term goals. Also SWP can be stopped anytime, so these can be used to meet a time bound goal and then stopped completely. Below are a few ways to use the SWP effectively and to your advantage.
1. Children’s Education
Today the cost of basic school education is very high in India. Moreover the education inflation in India is around 12%. The tuition fees of private schools in Tier 1 and Tier 2 cities is anywhere between Rs 2,500 to Rs 8,000 per month. By investing money in a mutual fund from the very beginning and then using the SWP feature you can meet the education expense comfortably. Let us understand how.
Nimish recently became a father to a daughter whom he named ‘Anika’. He started a monthly SIP of Rs 5,000 from the time of her birth. By the time Anika went to the first grade of school, six years had already passed. The SIP which Nimish started had already accumulated Rs 540,000 in six years time. Nimish enrolled her in a school where the annual fee was Rs 60,000. So by the time Anika was six years of age, Nimish already had school fees provision for the next 9 years! (540,000/60,000= 9) He continued the SIP for another 2 years and then used the SWP feature to pay for all of Anika’s schooling years. In this way Nimish planned for his daughters basic school education without creating any financial strain for himself.
2. Retirement Planning
SWP is a fantastic tool to build a complementary income source to the existing monthly retirement pension. Let us understand how this can be achieved. Milan is 35 years old and draws a monthly take home salary of Rs 90,000. He started a monthly SIP of Rs 10,000 to plan for his retirement. He continued the SIP until retirement. When Milan retired at age 60, the mutual fund investment was worth Rs 1.9 crore. He stopped the SIP and set up a SWP of Rs 30,000 per month. Milan received his monthly pension and also Rs 30,000 per month from SWP. Milan could lead a comfortable life post retirement by using the SWP feature.
3. Family Vacation
Today many people want to travel and explore new destinations. Tourism is a very buzzing industry and a large number of people want to have atleast one family vacation every year. For a family of four, a one week vacation in India would typically cost from Rs 50,000 and above. An international trip, would cost from a minimum of Rs 70,000 per person. For all the avid travellers who have a bucket list of destinations to cover, the SWP can work as a very useful tool. Let us understand how to use it.
Mira is 22 years old and recently got her first job. She is earning a salary of Rs 80,000 per month. Mira has decided to save money to take her parents on a vacation every year. She starts a SIP of Rs 20,000 per month. She continues the SIP for 5 years. At the end of 5 years the investment in the mutual fund scheme has grown to Rs 16,50,000. With this corpus ready, she sets up a SWP of Rs 25,000 per quarter. Her parents are now able to visit all the places which they wanted to see in India.
4. Regular Income Source
SWP is a fantastic tool to provide for a regular income source for people who have no retirement benefits. Let us understand how this is possible. Harsh is 21 and recently got his first job. He was raised by a single mother who did odd jobs to provide for his education. Harsh has a monthly salary of Rs 70,000. He set up a SIP of Rs 10,000 per month and continued it for 7 years. At the end of 7 years the investment corpus had grown to Rs 13,00,000. Harsh then stopped the SIP and set up the SWP with a monthly withdrawal of Rs 10,000 into his mother’s bank account. In this way his mother was assured of regular monthly income.
So the SWP is a fantastic tool if used wisely. You should only withdraw a monthly sum which you need. Start investing in a SIP early and continue with it atleast for 5 to 8 years before you set up a SWP.
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