A Systematic Withdrawal Plan (SWP) is a financial approach that allows investors to take a set amount of money from their mutual fund investments on a monthly basis. This plan is suitable for people who want a consistent source of income, such as retirees or those seeking passive income.
How does SWP work?
- Investment in Mutual Funds: The investor initially makes a lump sum investment in a mutual fund scheme.
- Regular Withdrawals: The investor determines how much money to remove on a regular basis (monthly, quarterly, etc.).
- Units Redemption: For each withdrawal, a fixed number of mutual fund units are redeemed depending on the Net Asset Value (NAV) for that day.
- Remaining Investment Growth: The remaining investment continues to increase in line with market circumstances.
Benefits of SWP
- Regular Income: Provides a consistent income stream, particularly for retirees.
- Market Risk Management: Unlike lump sum withdrawals, SWP helps reduce volatility concerns.
- Tax Efficiency: SWP may be more tax-efficient than regular withdrawals.
- Flexibility: Investors may choose the amount and frequency.
- Compounding Benefits: Long-term compounding benefits investors as residual money rise.
SIP vs. SWP: Which is Better?
Conclusion:
- If you want to build wealth over time, SIPs are a superior option.
- If you want a consistent source of income from assets, SWP is your best alternative.
SWP in Nepal: Is it available?
Mutual funds are becoming increasingly popular in Nepal, with certain fund institutions even offering systematic investing alternatives. However, SWP is not as commonly available in Nepal as it is in places like as India and the United States. Investors in Nepal mostly rely on dividend-paying mutual funds for consistent income.
If SWP is adopted in Nepal in the future, it may be a wonderful alternative for retirees and anyone seeking passive income.
