Initial public offerings (IPOs) can be an exciting investment opportunity for retail investors to potentially earn higher returns. However, investing in IPOs also comes with higher risk, as the company’s shares are being offered to the public for the first time.
Implementing a Systematic Withdrawal Plan (SWP) is a smart strategy that can help you make the most of investing in upcoming IPOs while controlling risks. Here’s a closer look at what a SWP involves and how it can support your IPO investments. Using an SWP calculator, you can quickly determine the proper withdrawal amounts and schedules to match your financial goals, ensuring your plan fits perfectly with your IPO profits and risk comfort level.
What Is A SWP?
It is a technique to take money out of your mutual fund steadily and organise it. You decide how much money you want to pull out and how often—every month or quarterly. Once you set it up, the mutual fund company sells just enough of your fund units to match your chosen amount and deposits the money into your bank account. Think of it as the reverse of a Systematic Investment Plan (SIP), where you spend money regularly.
The significant benefit of a SWP is that it gives you a reliable flow of income, which is excellent for people like retirees who need consistent cash from their savings. Plus, you don’t have to cash out everything at once, which can be risky if the market drops suddenly.
Benefits Of A SWP (Systematic Withdrawal Plan)
It offers many pros for turning your savings into income. They are:
1. Steady And Dependable Cash Flow
With an SWP, you can take out a set amount of money regularly. This gives you a constant cash stream to cover your bills or needs, making it easier to plan your spending and manage your budget without worry.
2. Freedom To Choose
With SWP, you can easily select how much cash you withdraw and when you can do this. For instance, you might withdraw cash every month, every three months, or even once a year—whatever works best for your lifestyle.
3. Tax Savings
When you get money through an SWP, there’s no tax taken out upfront (no TDS). This means you keep more of your funds without the hassle of immediate tax cuts.
4. Protection From Market Guessing
Pulling out a fixed sum at set times, you don’t have to stress picking the perfect moment to sell. Trying to time the market can be tricky and risky, but SWP keeps things simple and safe.
How An SWP Strategy Can Benefit IPO Investors
Here are some ways a SWP can help you as an IPO investor:
1. Book Profits At Regular Intervals
One of the most significant risks in IPO investing is failing to book profits in time. Stock prices are often volatile after listing. An SWP allows you to book profits at pre-defined intervals in a disciplined manner.
For instance, you can set up a monthly or quarterly SWP to withdraw 5-10% of the invested capital. This ensures you recover part of your investment regularly without having to time the market.
2. Get Regular Income
The withdrawals from a SWP are a source of regular income for you. You can use this to service any loans you may have taken to invest in IPOs or meet financial goals.
This income stream continues as long as you stay invested in the scheme. So you don’t have to liquidate your entire investment to generate cash flows.
3. Reinvest Withdrawals To Lower Risk
You could also use SWP withdrawals to reinvest into equity mutual funds or diversified portfolios. This allows you to recycle returns from IPOs into less risky assets.
Over time, you will build a more extensive and well-diversified portfolio. The power of compounding works better when you stay invested for long periods.
4. Benefit From Rupee Cost Averaging
In an SWP, more units are redeemed when market prices are high and fewer units when prices dip. This leads to rupee cost averaging.
Similarly, SWP withdrawals can be reinvested at different price points, lowering the overall purchase cost—another benefit of rupee cost averaging.
Implementing An SWP Strategy For IPOs
Here is a step-by-step process to implement a SWP strategy for upcoming IPO investments:
- Decide IPO Investment Amount: Based on your risk appetite and surplus investible funds, determine the amount you wish to invest in upcoming IPOs. Include some buffer to account for strong IPO listings.
- Choose SWP Withdrawal Amount: Pick an SWP withdrawal amount that allows you to take some profits off the table at regular intervals. 5-10% of invested capital every month or quarter is reasonable.
- Select a Debt Fund: Park the IPO investment amount in a low-risk debt mutual fund until you get IPO allotments. Liquid and ultra-short-term funds are good options.
- Switch to Equity Fund Post IPO Listing: Once you get IPO allotments, switch the investment amount to a diversified equity fund of your choice.
- Set up SWP on Equity Fund: Log in to your online mutual fund account and set up a monthly or quarterly SWP on the equity fund. Withdraw the amount decided in Step 2.
- Reinvest SWP Proceeds: Use SWP proceeds to reinvest in other equity funds or fixed income. This will create a diversified portfolio.
Conclusion
SWPs can be an effective tool for managing both risk and returns when investing in upcoming IPO issues. Regular withdrawals help book profits, generate income, reduce risk through diversification, and take advantage of rupee cost averaging.
By implementing a structured SWP strategy, you can benefit from IPOs’ growth potential while insulating your portfolio from excessive risk. This results in better investment outcomes over long investment horizons.
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