What is Systematic Withdrawal Plan

The process of systematic withdrawal of a defined amount of money at a regular interval from the invested Mutual Fund corpus(Equity / Debt) or Post office/Bank Fixed Deposit may be termed a Systematic Withdrawal Plan. This process is the reversal process of a Systematic investment plan wherein the investor regularly deposits/ invests to build a corpus. Both of these processes have the benefit of rupee cost averaging.

The regular withdrawal of money may be initiated to fill the gap between one's regular income and expenditure or it could be an alternate source of income for non-pensioners.

Till now, the retirees have been investing in Bank/Post Office Fixed Deposits for interest income for their expenditure. The inclination for Bank Deposits as an investment primarily was on account of the safety of funds and interest thereon and also moderate capital appreciation in the form of capitalization of a part of interest income. However, with the decline in interest rate in the ecosystem, the yield in the Bank and Postal Deposits has become very low. This low yield in interest income has affected the sustainability of the people who are partly or fully dependent on it. Income as their source of expenditure. Due to the low-interest rate regime and continuous inflation, the corpus begins to shrink in the case of people who are dependent on Bank /Post Office interest income.

Under the prevailing low-interest rates, which may continue to show a low Bank/Post Office interest rate, the best option for the investors is to invest in equities. Equities, historically have been given a higher interest rate of 14-15%, if invested for a longer period of time. The high returns represent the index on an average. However, the high returns in equities are to be factored in with the volatility in the equities market. People do also invest in debt-related instruments where returns are comparatively low but there is less volatility.

The volatility in the stock market gives rise to uncertainty of the returns in a shorter period of time. This deters many people to invest in equities. This nagging volatility and resultant uncertainty in the stock market can be taken care of by a systematic withdrawal plan. In a systematic withdrawal plan, withdrawal takes place at regular intervals.

The effect of the inflation can be warded off in SWP (Systematic Withdrawal Plan) by arranging the withdrawal in such a way that the rate of withdrawal is always less than the return rate of the invested equity or mutual fund at least by the rate of inflation. Supposing the rate of return on investment is 12% and the inflation rate is 4%, then the withdrawal rate per month should never be more than 8/12% (0.75%) of one’s investment. This way the corpus would be sustainable and the investor would be able to withdraw and maintain the corpus till his last and may bequeath it.

Besides rupee cost averaging, high returns, and averaging against inflation the other benefits of a Systematic withdrawal plan in an equity mutual fund are –

·        Withdrawal could be made as per one’s choice/need. Both amount and frequency could be altered according to one’s requirement. Therefore systematic withdrawal plan gives people flexibility in operation.

·        As Equity mutual funds provide better returns than other investment avenues, therefore by making a lower rate of withdrawals than the growth rate of the fund, there is always the possibility of capital appreciation due to the compounding effect of the corpus.

·        Further, the Systematic Withdrawal Plan in an Equity mutual fund has lower tax implications than the other investment returns. Firstly, there is no deduction of Tax at source on withdrawal in mutual fund units.  Secondly, the capital appreciation Tax is charged at the rate of 15% for short-term Capital Gains( pd. Less than 1 year) and the tax is 10% on the long-term capital gain(pd. >1 yr.).

Thus, we see that with the continuous decline in Post Office/ Bank Fixed Deposit interest rate, the systematic withdrawal plan in these instruments, which, in the past were the first choice of the retirees due to the security offered and assurance of good return. Since. In the last few years, the rate of interest has gone too low, whereby the sustenance of the people depending on them has become difficult. Under this backdrop, we find that the Equities are the instruments that pay a significantly high return which also takes care of the inflation. The volatility is taken care of by the rupee cost averaging of the systematic withdrawal plan. Besides this SWP provides the possibility of capital appreciation by compounding the assets. Withdrawal could be made as per the will and requirement of the holder providing flexibility in withdrawal. Further, they are better than other instruments on the gains in the corpus. Undoubtedly, a Systematic Withdrawal Plan in the mutual fund is the best option for a retiree as a pension option.