Assuming we follow disciplined investing and have accumulated enough money…then what? How do we use it?…whats the best way to withdraw it?
This is where we use SWP – SWP is Systematic withdrawal plan – It is a service offered by mutual funds for investors who want regular income. This option can offer Regular Income, Capital appreciation and tax affective returns.
The intent is to move our corpus to a comparatively safer fund like a balanced/hybrid fund and withdraw only a certain %, which should ideally be lesser than the funds growth percentage. This will ensure that while we continue to withdraw the amount but it doesn’t deplete our principle/initial corpus. We should leave a certain % of growth which should ideally be slightly higher or at least equivalent to inflation…This will ensure that the value of your capital is sustained. For eg..if you expect the fund to grow at 15% annually and the inflation is 6%, you should withdraw only 8%/annum and the balance 7% is used to grow/protect your principle value.
Let me explain with a detailed example…
If you had invested Rs 15 Lakhs in a mutual fund that generated 15%-16% annual returns. You can withdraw Rs 10000/- every month for 10 yrs and still have almost 30 lakhs at the end of 10 yrs. What we have done here is withdraw only 8% (1.2 Lakh/annum) and the balance 7-8% has helped the principle of 15 Lakhs to grow to 30 Lakhs in 10 yrs.