For the benefit of new comers, SWP allows you to mostly withdraw a fixed amount regularly from your mutual fund investments. It works like this: you invest the money (or your retirement corpus) in an equity or debt mutual fund scheme based on your investment objective and risk profile. You set up an SWP to withdraw a fixed amount monthly, quarterly, semi-annually, or annually as per your income requirement.
If it is that simple, why are investors so confused about it? Well, many investors believe that an SWP is a guaranteed return offered by mutual funds. This is an erroneous notion. When you are periodically withdrawing money through the SWP method, you are selling your mutual fund units to generate the income. That means, if you are not careful, you can eat into your capital.
That brings us to the next point: you have to be really careful while setting up an SWP to draw up a particular amount. First, you must ask yourself whether you want to take your likely returns out or also want to take a part of your corpus to generate the required income. Many investors and some advisors conveniently overlook this aspect and focus only on the income requirement.
This could be a costly mistake. If you start dipping into your corpus very early in your retired life, the corpus may not last you for your entire life. This is not a worry if you have a very large corpus. Otherwise, you should be mindful of this risk.
You also should not overlook your risk to generate extra returns. Many mutual fund advisors are asking investors to park the retirement corpus in equity mutual funds and start an SWP to draw a regular income. They may be adopting this strategy with the hope of generating more returns and sustain the corpus for a very long term.
This is a not sound strategy. As you know, equity can very volatile at times and it offers higher returns only in the long term. If you do not have the appetite for high risk and volatility, you should not opt for this option. A very bad phase in the market or fear of losing the capital may give you sleepless nights.
That is why many mutual fund advisors ask investors be mindful about where they invest and how much they withdraw while setting up an SWP in a mutual fund scheme. They ask investors to take a little lower than the likely returns if they do not want to touch their capital. For example, you should take only 6 per cent from your investment if you have invested the corpus in a debt scheme with a return potential of only 8 per cent. Similarly, if you are expecting double-digit returns from an equity scheme, only withdraw 8 per cent through SWP. This will ensure that your corpus do not lose its value over a long period.