SWP Explained | Benefits, Problems and The Hype #Finance

Many people have been asking me about SWP in the last few weeks. The main reason for this is social media, like Instagram and YouTube. For example, in a YouTube CashNews.co … comment – "instead of taking a home Loan and paying EMI directly," "is

it better to withdraw from SWP and pay it?" They asked if it really works. Some people have asked if SWP and SIP can be done together. Can SWP be done from a small amount? What tax will come from it? Many such questions were asked. Regarding how to make SWP work for us and importantly about

the problems in it, let’s see about all detailed in this CashNews.co. Greetings! my name is Boosan. You’re watching "Finance Boosan". Watch this CashNews.co. "More

powerful than SIP is something known as SWP." ( In the CashNews.co ) ( The power of SWP is something which people don’t know. ) ( People just understand SIP. ) ( SWP’s power is 10x more than SIP. ) ( SIP is Systematic Investment Plan. ) ( SWP is Systematic Withdrawal Plan, which

allows you to keep withdrawing. ) ( Now, the magic happens like this: ) ( I’ll give you one very simple example. ) ( You invest ₹20,000 a month for 20 years. ) ( At the end of 20 years, you’ll have a corpus of ₹2 crore. ) ( So you can convert it into a SWP. ) ( You can say,

"Now I will not put money, I will withdraw money. ) ( Since it’s 20 years, now you would want to withdraw ₹2 lakh out of it. ) ( So this ₹2 crore, you can withdraw ₹2 lakh for the next 20 years. ) ( From this corpus of ₹2 crore ) ( … effectively you can withdraw ₹4.8

crore out of a corpus of ₹2 crore. ) ( Because once you withdraw ₹2 lakh, the balance still compounds. ) ( Imagine, if you don’t withdraw ₹2 lakh ) ( … and you withdraw only ₹1.5 lakh. ) ( So after 20 years, any guesses what will happen to your corpus? ) ( Your corpus will be

₹7 crore. ) ( So you had ₹2 crore, ) ( you have withdrawn ₹3.6 crore, ) ( and after that, you’re sitting on ₹7 crore ) ( you can give to your kids, charity, or whatever you want to do. ) ( That’s your choice. ) In this, he claims that SWP is 10x better than SIP. Of course, SWP

is a useful thing, but we need to look at this data in detail, to understand the nitty-gritty of it. Now, I’ll take this same example. First, he says to, continuously invest ₹20,000 for 20 years. If you invest like that, he says ₹2 crore would have accumulated. Our return rate is assumed

to be an average of 12.5%, which is a reasonable return rate expectation. You can achieve ₹2 crore in 20 years. So, only if we have a big Capital like ₹2 crore when SWP starts, it will be beneficial for us. To go into more detail, after adding that ₹2 crore, we will withdraw

₹2 lakh from it every month. even if ₹2 lakh per month seems like a big amount now, the value of ₹2 lakh today and its value after 20 years will differ. He has taken ₹1.5 lakh as an example. To know the value of today’s ₹1.5 lakh after 20 years, we can use an

Inflation-adjusted calculator. In fact, I have already made a CashNews.co explaining 6 important calculators. Check the link to that and the free tool above or in the description . To calculate Inflation-adjusted, things that we can buy by spending ₹38,000 today,

will cost ₹1.5 lakh after 20 years. Because prices will increase year by year, we SHOULDN’T forget that ₹1.5 lakh is equivalent to ₹38,000 today. He says, we can withdraw that ₹1.5 lakh for another 20 years. Basically it means that, the value of ₹1.5 lakh will be even less after 20

years. If we calculate Inflation-adjusted, what costs ₹10,000 today, will cost ₹1.5 lakh after 40 years. The most missing detail above all is the return rate. We should have invested ₹2 crore in something. Only if it continues to grow by some percentage, this SWP will grow

easily for us. According to this calculation, assume a return of 12.5%, and assume it is consistently 12.5% every year. So, if we look at the problems in SWP, the biggest issue is the initial Capital requirement. Some people ask if we can start both SIP and SWP together. If we

start SIP and withdraw it immediately, then why should we start SWP? After investing a large amount, one way to withdraw it regularly is SWP. The problem I personally feel here is that … instead of naming it SWP or SIP fancily, if we regularly invest money, it’s called investment, and

if we withdraw money, it’s called withdrawal, there will be no confusion if we simply name it as investment plan or withdrawal plan. Beginners confuse thinking that SWP is a special product that gives more returns. Let’s see how much amount is needed to get SWP Yield.

For example, assume a retired person. Let’s assume that his family spends ₹50,000 every month. To get Cash Flow from SWP regularly for that ₹50000, he should have invested ₹1.5 crore. That too, this ₹50,000 is for current year. Next year, it will be a little higher.

Also, the expenses increase year by year. If this ₹1.5 crore is calculated by adjusting with Inflation, we can withdraw from it for more than 30 years. Here, the investement is ₹1.5 crore and withdrawal is ₹50000. That too, the withdrawal is 6.5%

Inflation-adjusted. We chose an investment with only 8% returns for 30 years. This 8% assumption is very important. We will discuss it in a while. Now, let’s consider the important missing piece – Tax. Basically, if we have invested in something and have got a

Profit, that Profit will be taxed. Let’s assume it is 12.5%. Similarly, we have already accounted for Inflation. We have seen after-tax Inflation-adjusted. That is, if we withdraw ₹50,000 every month, a portion of it will

go towards tax. Similarly, after a year, we would not have withdrawn ₹50,000; we would have withdrawn a little more. After another year, we would have withdrawn even more. So, every year, as per Inflation, our withdrawal volume keeps increasing In fact, we would withdraw a lot in

the last few years. Even if we withdraw like this, after 30 years, this ₹1.5 crore won’t be finished. The main reason for that is, … we have not withdrawn everything. We would have left some money as it is, … and that would have compounded. Through that compounding, we have the

remaining corpus after 30 years. We would have withdrawn more than ₹5 crore. Now let’s see why we have invested ₹1.5 crore as an initial investment. Spending ₹50,000 per month means ₹6 lakh spends per year. If we add 25 times more than this and invest that money, and withdraw from

that, it won’t exhaust till the end. So this is the number. So basically, 25 times annual expense is our fire number. If we had that money today, we could withdraw our family expenses from that alone. But not everyone has a huge amount like this. It will take 10-15 years to accumulate this.

This can be considered as a proper retirement plan. After retirement, regular Cash Flow will come from this. If there is uncertainty in accumulating this, or if there is an unexpected Income loss in the family, or if the breadwinner is lost, the same expenses will

occur. But not everyone has this huge amount today. That’s why, our Insurance coverage should be at least 25 times our annual expense. Means, for a family that spends ₹50,000 per month, there should be Insurance coverage of min ₹1.5 crore. To take such a

huge coverage at a low premium, term Insurance is the solution. We can take coverage of ₹1-2 crore at a premium of just ₹600-700. If there is that coverage amount, in the absence of a breadwinner, … this money will be an Income replacement for the family

for many years. If you don’t have a term plan yet, use the link in the description and comments to choose a proper plan. Even if there is no sufficient Insurance coverage, find out your fire number and take coverage for that amount. Fill in the basic information on Policy

Bazaar, and compare a proper plan among 50+ Insurance providers. In this platform, you get a dedicated relationship manager and claim support service. So for SWP, to create a regular Cash Flow for the long term, you must need a big Capital. The

next important problem in SWP is – Market volatility. Basically in SWP, we would have invested in a mutual fund, and keep withdrawing from it regularly. So, investing in a mutual fund will be market-linked. Means, there will be ups and downs. Let’s take a common example to understand

this. Let’s assume that you have 1000 grams of gold. You decided to sell some from this 100g every month … to get an inflow of ₹10,000. If the gold price was ₹6,000 in the first month, then selling 1.66g would get you ₹10,000 . Now, for some reason, the gold price might go down

from ₹6,000 to ₹5,000. In that case, if you want ₹10,000, selling 2g would get you ₹10,000 . Similarly, if the gold price has raised to ₹10000, then selling just 1g would get you ₹10,000 . So, for ₹10,000 that you need regularly, you sold 1.66g in the first month, and then sold 2

grams. Then if the gold price has gone down, you need to sell more grams to get ₹10,000. Then if the gold price has gone up, selling fewer grams will be enough. The same concept will work in SWP as well. You will have a lot of mutual fund units, and you will sell them little by little. If the

market has gone down, your NAV value would have been low. In that case, you would have to sell a lot of units to get the same amount. Whereas if the market has gone up, your NAV value would have been high. In that case, selling just fewer units will get you the same amount. So, basically, if you do

SWP when the Stock Market is down, you will have to sell a lot of units. If the market remains down for a long time, you will have to keep on selling many units. That’s why market volatility is a big problem for SWP. Even if we want to do SWP, we will have to do it with

non-volatile funds, … probably Debt funds or Conservative Equity funds. There won’t much ups and downs in this, so the price will be flat, and the volatility problem will be less. That’s why we assumed 8% in the SWP calculation. Usually,

Equity is said to come up to 12.5%. But if we do SWP with Equity mutual funds, we might have to sell a lot of units due to volatility. That’s why we have a conservative 8% assumption. If we go with conservative funds or Debt funds, SWP will

impact our long-term returns. To put it simply, if we put ₹30 lakhs in an instrument that gives 8% returns, and in another instrument with 13% returns, after 15 years, the fund with 8% returns would have grown to ₹95 lakhs. If we had put in the 13%, it would have come to ₹1.87 crores. So if

we had put in a conservative place with 8%, our returns would have been affected. Here, we have used a lump sum calculation. Even if we calculate it as withdrawal, SWP will significantly affect long-term Wealth Building. Next, instead of paying home Loans and EMIs

directly, many people through CashNews.cos suggest to pay the Loans through SWP. If you ask me if we can do that, " THERE IS NOTHING MORE FOOLISH THAN THAT. " Because the bank has guaranteed us an interest rate of 10% for the Loan. Means, the interest

rate that we pay is going to be fixed, and we have to pay that. But the returns from the SWP are not guaranteed. Particularly, if we want to get more returns than the interest rate, we have to invest in market-linked instruments, i.e., Equity-based Mutual Funds. If we invest in

market-linked instruments, due to volatality, we will get above 10% returns in some years and also negative returns some years. If we withdraw at such times, we will be at a loss in the end. So, mostly it’s NOT good for us to pay off the Loans through SWP. Next problem is

… If we start SWP for the next 30 years, there are many chances that it will get exhausted before that. Means, the chances of our Investments getting exhausted before that are very high. Because in general, the market is very uncertain, and our life events are more uncertain

than that. Now, for example, assume we get a big medical bill for some reason. If the expenses are ₹5 lakhs to ₹10 lakhs, then we might have to rely on this investment at that point. If we rely on that, we would have to sell more units. Particularly, if we get such a situation when the market

has fallen, we may have to sell more units unnecessarily, and our SWP might get exhausted soon. We should be prepared for such unplanned expenses. For example, we should save an adequate emergency fund. If not, if we want to be ready for medical expenses, we should have proper health

Insurance for the family. At least everyone in the family should have coverage of ₹5 lakhs to ₹10 lakhs. If you don’t have an emergency fund or health Insurance yet, prioritize that first. If you want to choose good health Insurance, use

the link in the description and comments. Here, we can get coverage of ₹1 crore with a premium of just ₹300-₹400. Since it is taken in policy bazaar, you will get 30 minutes claim support service and a dedicated relationship manager. Since the policy is bought online, you will get a premium

discount of 25%. Check the link in the description and comments. Now, let’s see how to use this SWP without any problems. If we are going to invest in a mutual fund and do SWP, we should usually have a separate buffer amount. This buffer amount can be used … … to move the required

amount for the next 3-4 years … into a fixed Income instrument. Probably a Bank’s Fixed Deposit or the Post Office Monthly Income scheme. We should move the required amount for the next 3-4 years into that from all the Investments we

have. Now, we will get a regular inflow from this monthly Income scheme. So, unlike a market-linked mutual fund, there is no ups and downs volatility. If the interest is fixed as 7%, we will get Income in that 7% interest. We should refill the buffer every 3-4

years. As it decreases, and if the market is very up, at that point, we should withdraw from the mutual fund … and transfer it into this. This fixed Income instrument will take care of our Cash Flow. Why do we keep the required amount for 3-4 years? Because,

in the short term, the market will be very volatile. Whereas in 3-4 years, we will get good opportunities. So, at that point, it will be helpful to keep the required amount in the fixed Income. Even if the market falls below 50%, since we didn’t withdraw from it directly, we

will have the confidence that the buffer amount is in the fixed Income instrument. We have seen about the problems in SWP and how to solve them. Now, let’s see the benefits of it. The first benefit is regular Cash Flow. Secondly, SWP is very flexible. If you

have invested in something, you can configure the withdrawal amount anytime. In some platforms, like SIP, they give a separate configuration for SWP. For example, if you see in Zerodha, you can configure SWP in your mutual funds. You can specify the monthly withdrawal amount. As per the date, the

amount will be Credited to the bank automatically. Even if there is no SWP in some platforms, if you withdraw manually every month, you can still call it SWP. So, we can decide how much to withdraw every month flexibly. Thirdly, there is Rupee cost averaging. Means, if you do SIP,

you will buy at all price points when they are down and up. By doing this, you will get an average price. While investing, SIP helps you to average the price. Similarly, if you withdraw your money at all the points, this SWP will be useful to average the withdrawal. The next important advantage is

Taxation. Before looking at it, either it is SWP or any instrument or technique, there’s no compulsion that you have to do it. You have to see if it meets your needs. Before that, you have to check if your financials are correct. You must have an emergency fund, term

Insurance, and health Insurance. You have to check all these. If you don’t have such basic things, I will give a link in the description and comments. You have to fix it first. Investing to pay off the Debts using the gains is also foolish.

You have to address your Debts soon. Now, let’s see how SWP is useful for taxation. In most cases, if we are going to do SWP, we would have done our investment long ago. If we hold Equity Mutual Funds for more than a year, and get Profit by

selling them, we call it Long-Term Capital Gains. Such long-term Capital gains are usually less than the short-term Capital gains. Even in that, we get an exemption of ₹1,25,000 every year. So, if we withdraw and if the withdrawal is less than

₹1,25,000, we don’t need to pay any tax for it. So, in that sense, SWP will be useful in tax exemption every year. To know how this taxation works for each fund in detail, check out this CashNews.co. If you find the information in this CashNews.co useful or new, like this CashNews.co : ) If

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