Equity Markets are dynamic in nature. Nobody knows the top of the market. If someone says so, he is just befooling you with his own analysis. I think nobody would have predicted that the market will form a top at 21000 levels of Sensex made on 05, Nov, 2011 & would correct thereafter.
When the markets had touched 21000 levels, the PE Ratio of index was at 21 & the market was looking over valued at those levels. Normally Indian markets trades between a PE Multiple of 15-18 its earnings estimates. Now that was the time when an investor must think differently & look to opt for Systematic Withdrawal Plan once the market crossed 18 PE levels.
What is Systematic Withdrawal Plan (SWP)
Just like Systematic Investment Plan, mutual fund houses also offer Systematic Withdrawal Plan. By opting SWP, one can redeem the mutual fund units systematically in parts on a monthly basis or on weekly basis unlike the onetime withdrawal where you have do the most difficult think i.e. timing the stock market which is impossible for any retail investor.
Let’s say you have 100 units of Reliance Growth Fund. You have opted for a SWP option to withdraw Rs. 1,000 every month. On 1 January, the NAV of the scheme is Rs. 50.
Equivalent number of units = Rs. 1,000 / Rs. 50 = 20 units
Thus, you are able to withdraw 20 units & you have got Rs 1000 back to your account
Your remaining units = 100 – 20 = 80 units
Now, on 1 February, the NAV is Rs. 55. Thus,
Equivalent number of units = Rs. 1000 / 55 = 18.18 units
Your remaining units = 80- 18.18 = 61.82 units
Comparison between two options
Now if you have withdrawn Rs 2000 on 1 Jan, you would have redeemed 40 units & the remaining units with you would have been just 60 whereas in SWP option, you would have got 61.82 units still invested.
It helps a retail investor to make an average of his selling price of mutual funds
Advantages of Systematic Withdrawal Plan
Provides Steady Income
Systematic withdrawal Plan is mainly opted by retired people who want a regular income after they have invested till retirement. It makes sure that you are getting a fixed income per month as a kind of salary for a retired professional
Avoids Timing the Market
SWP helps any investor to withdraw in parts which helps them to get rid of the most important work in stock market i.e. timing the market. It also helps in partly booking the profits.
Once you opt for SWP, short term or long term capital gain would be applicable as it normally does in lump sum withdrawals.
We have provided my insights to Systematic Withdrawal Plan. If you want to add up your own views, you are open to post comments.
– This article is written by Mr. Mayank Gupta, MBA Finance, who is running a wealth management company www.wealthbazaar.in