Systematic Withdrawal Plan
What is SWP?
SWP stands for a Systematic Withdrawal Plan that allows an investor to withdraw a fixed sum from their mutual fund scheme over regular periodic intervals such as on monthly basis, quarterly, semi-annually, or annually as per the requirements of the investor. SWP benefits investors who want a second income in addition to their pay from a regular job. Also, it could meet the regular pension needs of the senior citizens after retirement through fixed monthly withdrawals.
Investors can also use SWP for meeting recurring needs like EMIs, house rent, etc. by withdrawing investments regularly as per their needs. This way investors can also earn capital gains on their idle money.
Features of Systematic Withdrawal Plan:
- Tax implications
Any withdrawals made through SWP are considered as a combination of capital and gains on investment. The tax implication only arises for the gain portion of the withdrawals, and no tax is charged on the capital amount withdrawn.
2. Regular Income
An SWP lets an investor get a fixed periodic sum that can help him/her earn a steady income during his/her retirement years or handle educational expenses for his/her kids.
Systematic withdrawal plans lets an investor receive regular income through fixed periodic withdrawals which could help in meeting financial needs after retirement or handling the educational expenses of children.
3. Rupee Cost Averaging
SWPs provide the benefit of the average cost of units through the concept of Rupee Cost Averaging. Also, as investments are withdrawn periodically, the NAVs at the time of withdrawals keep on changing and investors are able to avoid the excessive risks owing to gloomy market conditions which could have been there if lumpsum withdrawal is made, hurting returns.
4. Withdrawal options
A systematic withdrawal plan enables the cash flow to be tailored as per the needs of investors. Investors may also opt to either choose the fixed periodic withdrawal option or the appreciation option. In the former, investors get a fixed amount every
month which includes the principal as well as the amount of the gains. Whereas in the appreciation option, the investors only receive the portion of profits or gain on investments.
5. Long term goals
An SWP option could help in meeting long term goals including recurring needs such as home loan installments, EMIs, school fees of kids, etc. If planned right, SWP withdrawals can be systematically routed to meeting repetitive expenses.
Who can opt for an SWP?
Anyone who has invested in any of the open-ended schemes of mutual funds can choose to initiate a Systematic Withdrawal Plan for a regular cash flow as per the requirements.
SWP Calculation and SWP Calculator
According to the Systematic Withdrawal Plan, a person must have an invested amount in the fund to initiate the SWP plan and start withdrawing a certain amount of the invested corpus over periodic intervals. After withdrawals, the units redeemed will be deducted from the total units as per the NAV price of the fund.
Below is the SWP calculation for an investor who has a capital of Rs.1,00,000 invested in 1,000 mutual fund units as per the current NAV of Rs.100. The investor wants to withdraw Rs.10,000 per month.
| Withdrawals | Amount | NAV | Units redeemed | Units left | Investment value |
| 1st | 10,000 | 100 | 100 | 900 | 90,000 |
| 2nd | 10,000 | 98 | 102.04 | 797.96 | 78,200 |
| 3rd | 10,000 | 105 | 95.23 | 702.73 | 73,786.65 |
| 4th | 10,000 | 103 | 97.08 | 605.65 | 62,381.95 |
| 5th | 10,000 | 99 | 101.01 | 504.64 | 49,959.36 |
Therefore, to make calculations easy, there are many SWP Calculators available online.