Want to earn 10,000 rupees every month for the next five years? Consider setting up a Systematic Withdrawal Plan (SWP) for your mutual fund portfolio. This popular method allows you to earn a regular income from your investments. Below, we'll discuss the basics and advanced features of SWP, including how to mix it with Equity-Linked Savings Schemes (ELSS) for tax benefits and compound growth.
Types of Systematic Withdrawal Plans
There are two main types of SWPs to consider. Let's break them down with practical examples.
Capital Gain Appreciation SWP
If you have 5 lakh rupees and want to get regular income while maintaining your initial capital, this option is for you. Suppose your investment earns a 10% annual return. You can withdraw 4,000 rupees per month. By the end of five years, you'll still have your original 5 lakh rupees while having withdrawn around 2,40,000 rupees in total.
The 4,000 rupees monthly withdrawal comes from the annual 10% return on your 5 lakh rupees, which is 50,000 rupees a year.
Fixed Amount SWP
If 4,000 rupees per month isn't enough, you might opt for a fixed amount of 10,000 rupees monthly. Here, you'll withdraw not only the returns but also part of your capital. Over five years, you'll withdraw 6 lakh rupees in total, reducing your capital to around 40,000 rupees by the end of the period.
Advanced SWP Options
Some mutual funds offer more flexible SWP options, like withdrawing a fixed percentage annually (e.g., 6%, 8%, or 10%). This approach allows your money to compound while still providing regular income. Additionally, some funds, like ICICI Prudential, let you increase your withdrawal amount yearly to adjust for inflation.
Mixing ELSS with SWP
Combining ELSS with SWP can offer significant tax advantages and compound growth.
Benefits of ELSS and SWP Combo
Tax Benefits: ELSS investments usually provide income tax benefits.
Capital Gains Tax Savings: SWP's smaller monthly withdrawals spread over time can result in lower capital gains taxes than a lump sum withdrawal.
Compounding: By reinvesting SWP withdrawals into new ELSS funds, your investment continues to grow.
How to Set It Up
Invest in ELSS through monthly SIPs (Systematic Investment Plans). After the three-year lock-in period, begin SWP from your first SIP, and reinvest the withdrawn amount into a new ELSS. Repeat this process annually to automate your investments and enjoy tax benefits.
Practical Uses of SWP
Home Loan Payments
If you have a home loan at an 8% interest rate and a mutual fund portfolio earning 12%, use SWP to pay part of your EMIs. This can ease your financial burden and help pay off the loan faster.
Personal Use
Instead of withdrawing a lump sum from your mutual fund, use SWP to avoid high capital gains taxes and benefit from rupee cost averaging.
Educational Expenses
Use SWP to pay for your child's education expenses. This method ensures a steady cash flow and minimizes financial stress.
Key Rules for SWP
Minimum Holding Period: Wait at least one year before starting an SWP to avoid exit loads and give your investment time to compound.
Best Practices: Ideally, allow your investment to grow for two to three years before setting up SWP.
Conclusion
Systematic Withdrawal Plans provide a dependable way to earn regular income from your mutual fund investments. Whether you need steady cash flow for expenses or want to maximize the tax benefits with ELSS, SWP offers flexibility. Consider your financial goals and choose the right SWP for your needs. If you found this post helpful, please like and share it with others looking to optimize their investments.
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