SWP Campaign by a Leading Asset Management Company – 101


               I am not sure how many of you have seen the Systematic Withdrawal Campaign (SWP) by a leading Fund House (AMC). The advertisement (ad) has been published in several Newspapers and Magazines (Not sure about TV)

Today, one of our clients, who is close to his retirement, sent me a note and asked for my opinion on the ad. Initially when I had seen the ad, couple of days ago, the text ‘SWP’ caught my attention. Since I am very familiar with SWPs, I did not spend time in reading the details. They had shown an illustration as how you can look at Systematic Withdrawal Plan as a periodic cash flow. The ad had also explained the advantage of SWP by which you can save on taxation.

Now comes the interesting part. As per the illustration, an Investor does a purchase for 50 lakhs in an equity fund and starts monthly withdrawals of 30,000/- (which will work out to 3.6 Lakhs) and at the end of the year the balance is about 52 Lakhs.

The following section details my point of view:

The Idea of investing a huge amount as a Lump-sum is not a good one (I wouldn’t do that for our clients or me, unless we are taking about a person whose networth is 50C+ and can afford to take such huge bets). In case if that approach is taken, starting to withdraw from month 1 is a poor decision and can backfire since the volatility in equity markets can erode the principal amount. A 10% fall will erode the corpus by 5 lakhs making it 45 lakhs. This is the reason why we insist on a cooling/settling period of 5 years for equity investments to play out. That way the stock movements of ups and downs and volatility of returns settle down. This is also supported by historical data. It is possible that the stock prices keeps increasing throughout the year which will then support the illustration (like a 1 year bull run). However, the risk level with this approach is very high. It’s like I need 10 Lakhs for one of my impending financial goals (say kids’ education) next year and I am investing this 10L corpus in equity based instruments.

Typically our suggestion would be build a corpus (Diversified Equity Funds or/and Balanced funds) over a period of time through SIP/STP/small Lumpsum and allow it to stabilize. During the distribution (when cash flows are required) phase, the SWP approach of monthly/periodic withdrawals can be effectively used.  

One Comment

  1. Very good write up Sendhil. I am now clear . Request you to share the applicability of short term capital gains on redemption and if there is a threshold limit. I believe filing income tax under that that income is cumbersome. Is it applicable for small gains or is there a limit beyond which it needs to declared in the return of income.

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