A lot has been said and heard about Investing in Mutual Funds via the SIP Route but what about Exit. If we can derive the Benefit of Averaging while Investing, can’t we again derive the benefit of Averaging while Withdrawing from a Mutual Fund?
The Answer to the above Question is Yes, we can draw the benefits of averaging while withdrawing funds from a Mutual Fund. Just like we have Systematic Investment Plans (SIP’s), in the same manner we also have Systematic Withdrawal Plans (SWP’s). SWP’s are exactly the opposite of SIP’s wherein Investors can specify a fixed amount that they would like to withdraw at defined intervals-monthly, quarterly or semi-annually-from their investments.
SWP’s help to withdraw from a fund over a period of time, without cashing out at one go and helps tide over the volatility in the markets which ensures that you don’t end up withdrawing all your money at or near the bottom of a market cycle.
How SWP works
On the specified date, units equivalent to the amount specified for withdrawal are redeemed at the prevailing NAV for that scheme. The amount is either credited to your account or a post-dated cheque is issued in your favour.
Let’s assume you have opted for a monthly SWP plan for withdrawing 5,000 from your mutual fund, where you hold 1,000 units. If on the chosen date in the first month, the NAV of the scheme is 50, you will redeem 100 units (5,000/50 = 100) from your holdings in that scheme. If the NAV subsequently rises to 56 by the next month, only 89.28 units (5,000/ 56 = 89.28) will be redeemed from your holdings. In the third month, if the NAV falls to 47, you will redeem 106.383 units. Over three months, you have thus averaged your exit at 51, higher than when you had started (at 50).
Financial planners say that an SWP should be started only if there is a real need for a regular income. It doesn’t make sense if the money is redeemed but it just lies idle in a bank account. SWP is a good option for retirees who want to supplement their pension and other income.