What Is A Systematic Withdrawal Plan And How SWP Works?
Learn all about Systematic Withdrawal Plans, their features, benefits and how they work.
Each of us has varied financial needs, and hence, a unique investment strategy is needed. When it comes to investing in mutual funds, some of us may prefer investing in a lump sum, while some may like to invest in a staggered manner with a systematic investment plan (SIP). Some of us may be looking for capital growth, while others may just want a regular income from their investments. Mutual fund houses offer various tools to meet such investor expectations. One such tool is a systematic withdrawal plan (SWP).
In this article, we will take you through the important details of an SWP. Let’s start with the meaning of an SWP.
What Is A Systematic Withdrawal Plan?
An SWP is a facility provided to mutual fund investors where they are allowed to withdraw a fixed amount from their mutual fund investment at regular intervals. As an investor, you can choose the frequency and amount of withdrawal. On the specified date, the fund house will sell the required units from your portfolio and transfer the SWP amount to your bank account.
What Are The Features Of A Systematic Withdrawal Plan?
Some of the key features of SWPs are:
This is a great option if you are looking for a regular income from your investments.
You can redeem your mutual fund units regularly with an SWP.
You can pick the frequency of withdrawals.
You can choose to withdraw a fixed amount or just the gains from your investment.
How Does A Systematic Withdrawal Plan Work?
Let’s understand the working of an SWP in mutual funds with an example:
You have 5,000 units of a mutual fund scheme. After 2 years of staying invested, you have instructed the fund house to start an SWP plan where you want to withdraw ₹4,000 every month.
Now, on the first due date of the SWP, the NAW of the mutual fund is ₹16. So, the number of units to be redeemed for the SWP will be 250 (₹4,000/₹16).
The fund house will see 250 units of the scheme from your portfolio and transfer ₹4,000 into your account. After the first withdrawal, your remaining units in the mutual fund will be 4,750 (5,000-250).
Now, on the second due date of the SWP, the NAV of the mutual fund is ₹20. So, the number of units to be redeemed for the SWP will be 200 (₹4,000/₹16).
The fund house will see 200 units of the scheme from your portfolio and transfer ₹4,000 into your account. After the second withdrawal, your remaining units in the mutual fund will be 4,550 (4,750 -200).
This process will continue periodically till the end of your SWP period.
What Are The Benefits Of A Systematic Withdrawal Plan?
Here are some of the benefits of opting for an SWP:
Flexibility An SWP offers you the flexibility to choose your withdrawal amount, the SWP frequency and the date as per your needs. You also have the option to stop the SWP at any time, add further investments into the scheme, or withdraw any amount from your investment over and above your SWP withdrawals.
Regular cash flow With an SWP, you can have a regular income from your mutual fund investments. This ensures that you have a regular cash flow that will help you meet your expenses.
No TDS on SWP If you opt for an SWP in mutual funds, there is no tax deducted at source (TDS) by the fund house.
Summing Up
A Systematic Withdrawal Plan in mutual funds is a great way to get a regular income from your mutual fund investments. Whether you are a seasoned investor or new to the world of money management, SWP is a great tool to have in your portfolio.
Suggested Read: The Mutual Fund Show: How To Invest Across Different Age Groups