Systematic Withdrawal Plan - SWP

What is SWP?

In simple terms SWP is the exact opposite of SIP.

In a SIP you invest in instalments or EMI and create a Lump sum, in a SWP, you invest a Lump sum and withdraw in Instalments or EMI.

Let us take an example:

Say, I have Rs.15 lakhs Lump sum. I invest the amount in a Debt Fund of a Mutual Fund. A Debt Mutual Fund invests money in Bonds and Wholesale Bank Deposits (CD) and hence is able to give a certain return without volatility. Though returns are not guaranteed, a certain rate can be assumed-in the current circumstances, let us assume 8% annual return. This means the monthly return is 0.6667%.

Let us assume that I instruct the Mutual Fund for a SWP of 10000 every month – this comes to 0.6667%. In other words, what I get as a return, I am withdrawing every month-so my principal amount remains the same.

Instead of investing in a bond fund , I can also invest in a Balanced Fund where returns could be 12-13% per annum, or Equity Fund giving 15-16 % - for a long term horizon like 5-10 years. However, this return could fluctuate in the short term of 1-3 years. If I need a guaranteed post-retirement I can remain invested in the Balanced/Equity Fund for the long term while going in for Systematic Withdrawal on a monthly basis. My monthly withdrawal amount needs to be aligned with the type of Fund that I am initially investing in.

What about Taxation?

Debt funds will be subject to short term capital gains (at the rate of your Income Tax) for a period upto 3 years and long term capital gains beyond 3 years (20 % after indexation)

Balanced and Equity Funds will be subject to short term capital gains tax of 15 % upto 1year but are

exempt from tax beyond 1 year.

Let’s take an example:

Fund : Debt Fund

Invested Amount 15,00,000

Investment Date 1/1/2017

Date of 1^st Withdrawal 1/2/2017

Assumed Annual rate of Return: 8%

Monthly Rate of Return: 0.6667%

SWP Instalment : 10000/ month

Income Tax Rate 10%

Date	NAV	Amount Withdrawn	Units withdrawn	Balance Units	Capital Gains	Capital Gains Tax	Value of Balance Units
						10%
01-01-2017	10			150000
01-02-2017	10.067	10000	993.377	149006.623	66.228	6.623	1500001
01-03-2017	10.134	10000	986.798	148019.825	132.018	13.202	1500001
01-04-2017	10.201	10000	980.263	147039.562	197.372	19.737	1500002
01-05-2017	10.269	10000	973.771	146065.791	262.294	26.229	1500002
01-06-2017	10.338	10000	967.321	145098.47	326.785	32.679	1500003
01-07-2017	10.407	10000	960.915	144137.555	390.849	39.085	1500003
01-08-2017	10.476	10000	954.551	143183.004	454.489	45.449	1500004
01-09-2017	10.546	10000	948.229	142234.774	517.708	51.771	1500004
01-10-2017	10.616	10000	941.949	141292.825	580.507	58.051	1500005
01-11-2017	10.687	10000	935.711	140357.114	642.891	64.289	1500005
02-11-2017	10.758	10000	929.514	139427.6	704.862	70.486	1500006
				Total Capital Gains Tax		427.6

Prasad wagle 

Financial Advisor

Systematic Transfer Plan - STP

What is STP?

Systematic Transfer Plan. A cousin of SIP, STP is s systematic Investment for someone who has a lump sum amount but wants to get the advantage of Rupee cost averaging. It is useful for people who get Lump sum amounts and are not assured of a regular and steady income.

How does a STP work?

Let us say I want to buy Onions worth Rs 500- which I will consume over the next 5 months. Taking the rates same as above- Rs.10, 15, 20, 25 and 10 for 5 months and assuming an interest rate of 6% for the next 5 months, we will get the following

	Rate of interest 6%
Month	Amount left	Amount spent on Onions	Rate of Onions	Qty of Onions	Amount left	Interest
1	500	100	10	10	400	2
2	400	100	15	6.666666667	300	1.5
3	300	100	20	5	200	1
4	200	100	25	4	100	0.5
5	100	100	10	10	0	0
5	5	5	10	0.5
	Total	500		36.16666667		5
	Average Price = 500/35.66667=Rs 13.82
	Mathematical Average of Onion Price=(10+15+20+25+10)/5=16

Compared to the SIP example, I get 0.5 kg of onions extra, which is nothing but the interest I earn on the Rs 500 that I keep in a Liquid Fund

In a STP, I keep my lump sum money in a Liquid Fund – which fetches me around 6% - and I transfer a regular amount into an Equity Fund or Balanced Fund of my choice. Advantage is Rupee cost averaging coupled with my idle money earning extra return.

What are the other benefits of STP?

Let us say you are already investing regularly in the form of a SIP. But let’s say you get some lump sum amount – say a Diwali Bonus or an Incentive or some Pension Arrears. You can park the Lump sum into a liquid fund and make a regular systematic transfer into an Equity Fund.

What is the Frequency of Transfers?

Please note that Transfers can be done at periodic intervals like Quarterly, Monthly, Weekly or even Daily. So, in case you are expecting huge volatility over the next month, due to an event like Yearly Results of Companies or Budget or RBI Quarterly review etc, you can go in for a daily STP.

Other Advantages

You can opt for a Flex-STP where in case of a market fall, a higher amount is transferred into the target scheme, thereby investing more when the market is low.

Today, most retired persons face the following problems:

-          Bank FD rates are low

-          Some Balanced Funds offer Monthly dividends but they are not assured

-          MIPs of Mutual Funds don’t guarantee Monthly dividend and Postal MIP is Taxable

-           

So, what is the option for getting a fixed/guaranteed amount every month without affecting the Principal amount Invested?

Prasad wagle 

Financial Advisor

Systematic Investment Plan - SIP

What is SIP?

Most of us know SIP – Systematic Investment Plan.

In simple words, it is an Investment in EMI form. Only difference between SIP and Loan EMI is that in a loan, you borrow a Lump sum amount and repay it in EMI (Equated Monthly Instalments). In a SIP, you pay EMIs and accumulate a Lump sum, which can be used towards meeting a Financial Goal or Objective.

What is the advantage of SIP?

In simple terms, rupee cost averaging. Let’s look at an Example:

I buy Onions worth Rs 100 every month-my amount spent on onions is fixed. However, the rate of Onions could vary. Let us say it is Rs.10, 15, 20, 25 and 10 for 5 months.

	Amount	Rate of Onions	Qty of Onions
	100	10	10
	100	15	6.666666667
	100	20	5
	100	25	4
	100	10	10
Total	500		35.66666667
Average Price = 500/35.66667=Rs 14
Mathematical Average of Onion Price=(10+15+20+25+10)/5=16

So, though the average price of Onions over the 5 months period was Rs.16/kg, my average purchase price was Rs 14.

When does a SIP work Best?

A SIP works best when the market fluctuates in the short term and rises upwards in the long-term (2014-2017)

When Market rises upwards

SIP AMOUNT NAV UNITS 1 10000 10.00 1000.00 2 10000 11.00 909.09 3 10000 11.00 909.09 4 10000 12.00 833.33 5 10000 11.75 851.06 6 10000 12.25 816.33 7 10000 13.00 769.23 8 10000 14.00 714.29 9 10000 15.00 666.67 10 10000 14.75 677.97 11 10000 15.00 666.67 12 10000 16.00 625.00  TOTAL 120000 9438.72

Total invested amount in 12 months is Rs. 1,20,000.00 and Market value is Rs. 1,51,020.00

When does a SIP fail?

A SIP fails when the market fluctuates in the short term and falls in the long term (2010-13)

When Market falls

	SIP AMOUNT	NAV	UNITS
1	10000	16.00	625.00
2	10000	15.00	666.67
3	10000	14.75	677.97
4	10000	15.00	666.67
5	10000	14.00	714.29
6	10000	13.00	769.23
7	10000	12.25	816.33
8	10000	11.75	851.06
9	10000	12.00	833.33
10	10000	11.00	909.09
11	10000	11.00	909.09
12	10000	10.00	1000.00
	120000		9438.72

Total invested amount in 12 months is Rs. 1,20,000.00 and Market value is Rs. 94,387.00

SIP is best when one has a Long Term Goal like a child’s education/marriage or retirement planning and has a regular source of steady income.

These days you get Flexible SIPs where you can choose your SIP date, vary your SIP amounts and so on. Also, you can opt for a Step-up where your SIP amount increases every year. Say, you start with a SIP amount of Rs 2000 with a step-up of Rs 500 every year. The 1^st year, your SIP amount will be 2000, next year 2500, year after 3000 and so on.

Prasad wagle 

Financial Advisor