Systematic Withdrawal Plan (SWP) is a facility offered by mutual funds that allows investors to withdraw money from their investments at regular intervals. It is an easy way to get periodic payments from your mutual fund investments. Let’s understand the working, benefits, and calculation of SWP in detail.
How does SWP work?
SWP allows investors to withdraw a fixed amount from their mutual fund investment on a regular basis. The withdrawals can be scheduled monthly, quarterly, half-yearly, or annually based on the investor’s requirement.
For example, if you have invested ₹5 lakhs in an equity fund, you can set up a monthly SWP of ₹20,000. This way you will receive ₹20,000 in your bank account every month by redeeming the required number of units from your mutual fund investment.
The withdrawals under SWP are treated as redemptions from the mutual fund scheme. When units are redeemed to make SWP payments, capital gains tax may arise if there are gains on the units redeemed.
Benefits of SWP
Here are some major benefits of using SWP for mutual fund withdrawals:
Regular income – SWP provides periodic payments to meet regular income needs in a tax-efficient manner. The payouts can be customised based on your expected monthly expenses.
Flexibility – You can stop, modify, or restart the SWP anytime as per changing income needs. The amount, frequency, and period can be altered over time.
Disciplined withdrawals – SWP enforces discipline and prevents investors from making hasty withdrawals based on market movements. This allows long-term growth.
Lower transaction costs – It is more cost-efficient to withdraw periodically than numerous small redemptions over time.
How are SWP payments calculated?
Let’s understand SWP payout calculation through an example:
Invested amount: ₹5,00,000
Monthly SWP amount: ₹20,000
NAV at the beginning of SWP: ₹100
Total units at the start of SWP: 5,00,000/100 = 5,000 units
Units redeemed each month: Monthly SWP amount/NAV
If NAV is ₹100, units redeemed per month is 20,000/100 = 200 units
So, each month 200 units will be redeemed and the net asset value after the SWP will reduce accordingly. If NAV rises, fewer units will be redeemed to provide ₹20,000 and vice versa.
You can also use a SWP calculator for easier computation.
SWP withdrawal options
Mutual funds offer two main options for SWP withdrawals:
Fixed amount withdrawal – In this case, the SWP instalment amount remains constant irrespective of changing NAVs. So, the number of units redeemed per month varies based on NAV.
Fixed unit withdrawal – Here a fixed number of units are redeemed each month. So, the SWP amount varies based on the NAV movement of redeemed units.
Fixed amount SWP is preferable for regular income needs, while fixed unit SWP allows equity exposure to continue.
SWP offers a flexible, tax-efficient method to generate cash flows from your mutual fund investments. By customising the SWP amount and schedule, you can structure withdrawals to suit your needs. But don’t over-redeem units and erode your capital. Use SWPs judiciously as part of your overall financial plan.