Planning retirement is a must and equally important is how you execute your plans post retirement. Setting aside funds during the accumulation phase of your retirement planning, helps you build a corpus. But, at the end of the day you should also know how to use the corpus, smartly and effectively, in order to live a relaxed retired life.

Until a decade ago, Pension Schemes, Post Office Monthly Income Schemes, Senior Citizens Savings Schemes and bank deposits were perhaps the only options with individuals who needed to park their retirement corpus for retirement planning. However, over last one decade or more so recent years, SWP in mutual funds has emerged as one such option.

The basic requirement of retired individuals is to seek regular monthly income at minimalistic risk. While investments in traditional products kind-off sets things right with perspective to the risk factor, a smart planning while seeking the SWP route through mutual funds can help the individual counter risk and be in position to seek higher returns on the capital invested.

Let me explain how:
First - What is SWP?
Systematic Withdrawal Plan (SWP) is a facility through which investors can avail regular income from their investments in eligible mutual fund schemes. The investor needs to decide on the amount required and the frequency (weekly, monthly or so) while availing the SWP facility. Say for instance, Mr. X wants a monthly income of Rs. 40,000 and has a retirement corpus of Rs. 50 lakh.

Second - Why consider SWP?
Technically speaking, an investment of Rs. 50 lakh in any of the above mentioned traditional products could yield a return of 6-10% per annum. At the higher end of the interest rate cycle (i.e. 10%), the investor is expected to earn interest income of Rs. 5 lakh, which meets the retirement planning requirement of Rs. 40,000 monthly income. However, the catch is that as per the existing tax laws, interest income is taxable. Hence, the actual net income could be lower.

Here, SWP acts as tax efficient solution to avail monthly income. To avail a monthly income of Rs. 40,000, only the relevant number of units will be redeemed. Say for instance, at the time of investment the investor had received 50,000 units considering that the NAV was Rs. 100. Again considering 10% return (NAV Rs. 110) at the end of first year, the investor would have redeemed approximately 4,365 units (4,364 * 110 = 4,80,040) only. For taxation purpose, the approximate net income could be only Rs. 43,636, after taking into consideration the difference between the cost of investment (4,364 * 100 = 436,400) and the price at which the units were redeemed.

Now, that’s the beauty of the SWP facility - while your remaining investment is positioned for possible capital appreciation, you also get the benefit of tax efficiency based on the extent of units redeemed per financial year.

How to plan an effective SWP?
A 10% return may sound a bit unrealistic. But the fact remains that in past many equity funds have given higher than 10% annualized returns. In the last five years, the S&P BSE Sensex and the Nifty 50 index have generated a CAGR (Compound Annual Growth Rate) of 14.28% and 14.41%, respectively. If the investor is risk averse, that he/ she needs to carefully craft a mid-path for an effective SWP.

For instance, the Rs. 50 lakh corpus can be divided into three different categories of funds as follows. 10-15% in Instant Cash Funds or Ultra Short Term Funds (this way any unforeseen emergency too is taken care off). 15-35% in Dynamic Bond Funds (which are said to relatively lesser volatile than equity) and balance 50% in equity funds (possibility of higher capital appreciation), and appropriately set the Rs. 40,000 SWP in the same ratio of 15:35:50. This way not only will the investor be able to manage the risk better, but also deploy his capital in the best possible way to appreciate from favourable market conditions.