Systematic withdrawal plan: Exit at right time for higher gains

Investing isn`t just about picking the right funds and products. Unless you are able to maximize your returns by making the exit at the right time, you wouldn`t be able to fully realize the fruits of your well-thought out investment plan. Even the best products are susceptible to the vagaries of the market and can make your investments look like duds in the short run. While timing the market isn`t something that average investors are good at, one can cut losses, and benefit from market upswings by making exits at periodical intervals.

A systematic withdrawal plan (SWP) allows you to do just that. SWP is the opposite of systematic investment plan (SIP) and lets you to automatically redeem a predefined amount of your investments at regular intervals. With even dividends from diversified equity mutual funds (MFs) to be taxed at 5% under the new direct taxes code (DTC), investors can take the growth option and pull out the gains through an SWP.

``SWPs will become more popular after the DTC comes into effect as it is tax neutral (not much change in tax structure),`` says R Raja, head, products, UTI MF. The biggest advantage with SWPs like SIPs is that it eliminates the risk of timing the market. ``Only if you try to time the market you lose. With SWPs you neither exit at the opportune moment nor at the inopportune time and by this you can average out your withdrawals (from the corpus),`` he adds.

``SWP is a good way of disciplined profit booking. Just like one has an investment discipline (through SIPs), a discipline in selling is also necessary,`` says Lakshmi Iyer, head (fixed income and products), Kotak Mahindra MF.

However, SWPs, unlike SIPs, are not widely used by investors because they are more used to redeeming their units as and when they want, she says. But inert investors may hold on to the gains and cash out at the wrong time leading to losses, say observers. An SWP would help an investor to rebalance the portfolio and reallocate cash to other efficient asset classes depending on market conditions, they say.

But it has its downside as well. ``SIPs and SWPs are not a sure recipe for success. They would lose out in a continuously falling market,`` says an industry official. With the markets trading within a band, one needs to be careful about exercising such options, say observers.

The amount to be withdrawn through an SWP is based on an individual`s requirements and the corpus which is invested.

The article is contributed by R Raja, head of products, UTI Mutual Fund. The views expressed here are personal and not necessarily of the fund house.