Working hard and saving your money is not a sound investment plan; a fact that is recognised by many. However, one account where people fail is to strike the balance between investments and regular withdrawals from the said investments.
Further, with the rising popularity of tools like Systematic Withdrawal Plans, this is an additional risk. The prime reason behind this is that people withdraw too much and too often via transferring money out of their Demat Accounts meaning their dematerialised trading account.
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Transferring Money from A Demat Account
Your Demat account meaning your dematerialised account is the electronic account that holds your stocks, shares, bonds, mutual funds, and others. Thus, you do not directly transfer money from your Demat Account to your savings.
Instead, you have to liquidate, i.e., sell some of your assets and transfer this through a trading account to your bank account (savings). To add, you will also need to pay Capital Gains Tax on any profits made from this investment.
Thus, this keeps you fairly liquid and allows you to gain from the Financial Market. While this sounds promising and offers flexibility, in practice, it can have a lot of drawbacks.
Issues When Withdrawing Money from Your Demat Account
Transaction failures, issues with the interface, and a cap on the amount that you can withdraw are mostly technical problems. However, frequent or high value withdrawals from a Demat account come with another set of problems.
These include:
- A loss in financial discipline.
- A negative impact on your investment portfolio.
- Direct financial losses when withdrawing at the wrong time.
- Reduction in the amount of returns from a particular investment plan.
Earning with Systematic Withdrawal Plans (SWPs)
An investment strategy, SWPs allow mutual fund investors to withdraw small amounts from their investment portfolio while the rest of the amount stays invested and continues to grow. Thus, SWPs allow people to gain regularly from their mutual fund investments.
As attractive as they are as an investment tool, SWPs are meant more for experienced investors instead of beginners. The primary reason being that frequent, heavy investments can significantly harm your portfolio and lower your yield. Thus, in the long run you will stand to gain very little from this.
One way to combat this is by evaluating your optimum withdrawal amount using a SWP Calculator.
Using the SWP Calculator
A free online tool, SWP Calculators are available on a number of platforms that offer investments and financial advice. By accounting for your initial investment amount, withdrawal per month, rate of return and period of investment, the SWP Calculator calculates how much you stand to receive at the end of the investment period.
The basic formula used by the SWP calculator is as follows:
A = PMT ((1+r/n)^nt – 1) / (r/n)
Here,
A = final sum you will receive
PMT = your payout for each month
r = expected rate of return
n = number of compounding periods.
t = total period of investment
To learn the final yield or value of your investment, all you have to do is enter the value of your initial investment, and then the above mentioned parameters. This online tool will calculate and let you know if the amount you are intending to withdraw is right or not.
Advantages of SWP Calculator
Using the SWP calculator has the below benefits:
- Is usually a guided system and fairly easy to use.
- Saves time that you can spend on manual calculations.
- Reduces the chances of errors.
- Helps with financial planning
- Helps you gain financial literacy.
- Acts as a comparison tool when evaluating multiple investment plans.
- Gives your financial literacy a boost.
Managing Withdrawals with SWP Calculator
Using SWPs you can plan your finances in a way that they provide you with regular earnings. Further, the amount that stays invested contributes towards your retirement plans.
However, one major issue remains in Systematic Withdrawal Plans (SWP) is that if the regular withdrawals are too high, then you will lose out on the chance to grow your investment. Further, instead of allowing you to earn over time, it will actually lead to indirect financial losses.
The easiest way to learn what is the optimum value of withdrawal that can take place and what is the maximum amount, you, as an investor, can take advantage of the SWP Calculator.
Applying the SWP Calculator in Investment Planning
Use the formula for multiple withdrawal amounts and time periods. This will cause a change that will reflect in the final value of the investment (A). With the help of this, try to arrive at an optimum value that you need at the end of the investment period.
Further, be sure to account for the following:
- What your plans for the future are regarding the particular investment.
- Whether you wish to use the amount you withdraw as a regular income or for a specific activity.
- Your seed amount and the plan you are investing against.
To Conclude
SWPs are a great investment plan if you seek to grow your investments while making regular withdrawals. However, to ensure that you do not deplete your savings, it is important to understand how much you can withdraw and the frequency for the same.
Use the SWP Calculator to evaluate how much you can withdraw without harming your investment or the portfolio as a whole. Set an optimum amount to get the most out of your savings.
