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What Is SWP – Systematic Withdrawal Plan – Benefits & Risks:

My friends uncle retired recently.He has received retirement benefits of nearly 40 lakh.

He want to make some provisions of monthly income (Rs.40,000 per month)throughout retired life.Now he has following options to get periodic income benefits.

  1. Senior Citizen Savings scheme (Quarterly income).
  2. Fixed deposit – Non Cumulative.
  3. Immediate annuity from insurance company.
  4. Periodic dividends from mutual fund scheme.
  5. SWP – Systematic withdrawal Plan from mutual funds.

To get monthly income of Rs.40K from fund value of Rs.40 Lakh one need to get yield of 12%.Any safe,fixed income product can not offer 12% yield so investor don’t have other option but to withdraw some part from principal also.

Here we will take view of 5th option -SWP : Systematic Withdrawal Plan where part of fund value will withdraw periodically.

What is SWP:

SWP is just opposite to SIP where investor takes fixed money out periodically over a period of time.This facility can be used to fulfill monthly requirements like for monthly income in retirement years, loan EMIs etc.

Units from scheme will be redeemed monthly at prevailed NAV and money will be credited in investors saving account.

Example of SWP:(Last 10 yrs)

  1. Scheme:ICICI Prudential Balanced Fund.
  2.  Date of investement:April 01, 2006.
  3. Amount invested: Rs.40 Lakh.
  4. Monthly withdrawal: Rs.40,000.

Then Units and fund value in Month of APRIL of each year will be :

WHAT IS SWP?

  1. Amount invested: Rs. 40L
  2. Total Amount withdrawn: Rs. 48L
  3. Current Value:Around Rs. 20L

One can view that number of units will be redeemed each month and units will go on decreasing.

So key benefit is that monthly income needs are fulfilled.

But risk is that principal will not be protected.There will be withdrawals when market is down.If market consistently remains down then principal value can vanish earlier.

So, Its O.K. to go with SWP from Equity / Balanced fund  if you have created wealth from market itself otherwise opt this facility if you agree with fluctuations with principal value .

If one can compromise with needs  then go for  safe,fixed income  options listed above or very low risk options like liquid,ultra short term funds.Its always  better to optimize the needs, isn’t it?

Lumpsum & STP Returns Comparison-Initiated At Market Peak:

Generally, investor has two options to invest lump sum in mutual funds.First is to invest directly in equity mutual fund and other is to invest lump sum in liquid fund & then transfer fixed amount systematically in equity fund.

2008 market crash is well known &  wild swings can affect the overall performance of funds.We will check fund performance under high volatility period from January 2008 till April 2016.

Today, we will take past reference if investor have invested Rs.5 L lump sum at market peak in 2008 & if STP was initiated at the same time.

Here we will assume that investor have invested Rs.5 lakh in ICICI Prudential balanced fund on January 01, 2008 &  if on the same date STP was  initiated from Liquid fund To balanced fund.

Lump sum investment:

Result of lump sum invested :

LUMP SUM VS SIP INVESTMENT

Result of Systematic investment:

SIP - LUMP SUM COMPARISON

Summarizing,

  1. Valuation as on today (18-04-2016) if Rs.5 lakh invested lump sum: Rs.9,65,000.
  2. Today’s valuation if Rs.5 lakh invested systematically: Rs.10,59,070

Concluding,

  1. Valuation is higher for systematic investment as market have gone through high volatility.
  2. Systematic investor may have psychological support if market went through high volatility.
  3. Its not possible for any one to predict extent of volatility so lump sum Vs systematic debate is irrelevant. Lump sum investment may work  better in absence of downside volatility and vice versa for SIP.
  4. Choose lump sum or Systematic option based on cash flow requirements & risk profile.

NAV Update On Tata Own A Piece Of India Theme:

Last December, TATA mutual fund was come with a theme : Own A Piece Of India where AMC launched different sectoral schemes under one umbrella.

Here just we have provided NAV updates of 5 sectoal schemes:

 

Fund Name   NAV as on 17-04-2016
TATA Banking & Financial Services Fund 10.22
TATA digital India Fund 10.31
TATA India consumer Fund 9.78
TATA India Pharma & Healthcare Fund 9.58
TATA Resources & Energy fund 10.55

This theme offer investor to invest & manage sectoral allocation with ease.It offers opportunity for investors who want to manage their own portfolio allocation.

Imp Notes:

  • Investor can invest across different sectors and can make its own diversified fund.
  • Based on NAVs,investor can track performance of different sectors.
  • Its likely that either sector / sectors will outperform broader market.Investors who understand the market can actively manage own portfolio based on NAV movements.
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