Assume a fund growth between 8-9% p.a. (there are many such funds). Effectively such a fund is paying 0.67-0.75% per month.
In reality, returns are not linear. I.e. based on interest rate scenario fund will move up say 1% in a given month and move only 0.1% in yet another month but will grow at 9% on yearly basis.
So how do you make sure you receive the same fixed amount on the same date every month?
So long as you know the fund grows approximately 9% every year, you can set up an SWP of 9% to be paid monthly/ quarterly or yearly basis. Consider this example based on an investment of Rs. 10 lakhs.
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Amount invested = Rs. 10 Lakhs | NAV of 1 Unit = Rs. 10
Hence, units purchased = 1 lakh (10 lakh/10)
Now you know that each month the unit value will move slightly higher, increasing 9% on average for each year, correct? (in one year, NAV will be Rs. 10.90 per unit)
Hence you give a mandate the fund house to sell 0.75% of units on the 1st of each month (or any other date) and transfer that amount to your bank account. You will receive Rs. 7500 on the 1st of each month while the fund value will remain Rs. 10 Lakhs.
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Note: Keep in mind that this is a conceptual article so I have rounded the figures to explain the workings of an SWP. In reality, the SWP amount should be set slightly lower (say by 0.10-0.20%) than the rate at which the fund is growing. This is because the annualized rate of 9% assumes that nothing will be sold monthly or quarterly within the year.
For further discussion or to get started with a financial plan, please write in to rajat@sanasecurities.com
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