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In essence, SWP is the reverse of SIP. Where in SIP you look at accumulating a corpus by making regular investments into a fund, in SWP you regularly withdraw a fixed amount of money from a fund. The amount to be withdrawn and the frequency is fixed by the investor. So you can have a month-ly, quarterly or annual frequency for any fixed amount that you wish to receive.

Mr Gupta would be very happy to receive a fixed amount in his ac-count every month, when he retires. Anchal is currently on a sabbatical to bring up her baby. She would be thrilled to put her savings to use for generating a small regular income flow for herself. SWP can help Mr Gupta and Anchal plan their cash flows. This is one of the many methods available for generating a regular income from your savings.

Let us look at some examples of how this strategy will work. Say Mr. Gupta has Rs.10 lakhs which he wants to use for generating income through SWP. Let's look scenarios with investments in three different type of funds.

 Amount Invested: Rs 10 lakhs

 Systematic withdrawal amount: Rs 10000 per month

 Date of SWP: 2nd of every month

 Start of SWP: 02 Feb 2010

 End of SWP: 20 Feb 2013

 Total amount withdrawn: Rs 240000

For simplicity we have taken three funds from the same fund house and not considered taxation in these calculations.

Balance in Folio as on 4 Feb 2013:

 HDFC Top 200 Fund (G): Rs 9.07 lakhs

 HDFC MIP LTP (G): Rs 8.71 lakhs

 HDFC Income Fund (G): Rs 8.39 lakhs

Let's look at a hypothetical case where you invest Rs 10 lakhs and the fund gives a return of 9%p.a. You run a SWP of Rs 10000 per month. In this case your funds will last you for 182 months. That means will be funding more than 15 years of your needs. In this case, if your annual withdrawal is less than the expected annual rate of return, then the SWP can run to perpetuity. So if our fund can be expected to give 9% return, if you draw only 7-8% of the invested corpus every year, you can use your one time investment forever.

Both these schemes offer guaranteed returns. But they also have limitations in terms of amount, period and mode of holding. SCSS allows maximum in-vestment of Rs 15 lakhs in one name and is currently offering a rate of 9.3% p.a. Which means you can get a minimum monthly income of Rs 7750 from this source. Similarly POMIS allows maximum in-vestment of Rs 4.5lakhs in single name and Rs 9 lakhs in joint name. Current rate of return is 8.2%. Hence the maximum monthly income from this source can be Rs 6150. Both these incomes will be fully taxable as per the tax slab applicable to the investor.

So while the income is guaranteed and regular, there are other restrictions. In such scenarios, SWP option of MF becomes a strong contender for a place in the portfolio as a big support to these options.

Benefits of SWP

Regularity: With an SWP, you are assured of get-ting a fixed amount at your pre-determined frequency. The problem with other options like a monthly income plans, which pay dividends, is that the amount and the frequency of the payouts is not fixed. Sometimes, if there is no appreciation which can be distributed, you might have no dividends to be paid. Hence every month you will have different amounts coming in and some month there might be no money received.

Taxation: SWP is better from the taxation point of view too. In debt funds dividends are paid after deduction of dividend distribution tax (DDT) of 28.32%. So that will be your tax in case you depend on dividend income from your debt mutual funds. In case of SWP, you will pay a short term capital gain (STCG) or a long term capital gains tax (LTCG). Though STCG may be more ex-pensive as it is on the income slab of the investor, LTCG will be beneficial as it is a fixed rate of 10% or 20% with indexation. Things get better in case of SWP from equity funds. As the long term capital gains from equity mutual funds are exempt in case of holding beyond a year, you end up paying no tax on the withdrawals.

Inflation Protection: Most of the fixed income instruments do not offer inflation beating returns. So, though the principal may be secure, the income might fall short of needs in future. Here again SWP scores in terms of generating returns to keep up with inflation especially if you opt for an equity fund.

The only drawback in the SWP is that it will at some point eat into your capital. But judicious mix of investment instruments will ensure that your primary goal of income generation will be met without you running out of money in times of need.

So the conclusion is that SWP is a noteworthy strategy to use for generation of regular income in various scenarios.