Systematic Withdrawal Plan (SWP)

Understanding the Benefits of a Systematic Withdrawal Plan (SWP) for Effective Financial Management.

What is a Systematic Withdrawal Plan (SWP)?

The opposite of SIP is SWP. An SWP enables you to withdraw amount from your mutual fund corpus at pre decided interval. In SWP, as long as you have enough units to cover your cash flows, it generates consistent cash inflows and keeps your remaining corpus growing with market conditions.

Advantages of SWP –

1. Regular cash inflow - Provide a steady and regular flow of money, which can be useful for budgeting and managing monthly expenses.

2. Flexibility: You can adjust the amount and frequency of withdrawals as needed. This can manage your cash flow according to changing needs.

3. Capital appreciation - By managing withdrawal rate lower than the overall returns

generated by the fund, you may ensure your remaining investment to continue growing over time.

4. Tax efficiency - Helps manage taxes better than lump sum withdrawals or pension plans. Tax rate depends on type of scheme invested.

Common FAQs about SWP –

Q. Which option Is better SWP or Dividend payout?

A: In IDCW option dividends are paid only from the accumulated profits of the scheme which is not assured or pre-decided, where-as in SWP, you can withdraw according to your needs.

Q. Can I change SWP amount later?

A: Yes, you can increase or decrease the withdrawal amount as your needs change.

Q: Can I stop SWP for few months ?

A: Yes, you can pause for few months, restart after few months. Entire flexibility is with the investor.

Q: Are SWP tax free?

A: No, SWP are not tax free. The type of fund and the duration of holding determine the tax rate.

Q: What happens if the market falls?

A: SWP continue as scheduled. However, the corpus value may reduce temporarily, more units get redeemed during market fall.

Misconceptions about SWP

1. SWP means no compounding

No, with proper planning of withdrawal rate lower than the overall return generated by the fund, it may enable your remaining units value to continue growing over time.

2. SWP returns are fixed

Withdrawal amount can be fixed, but fund returns vary with market performance.

3. SWP is complicated

No, just like SIP, SWP is simple, automated, and easy to manage once set up.

4. SWP is only for retirees –

No, it can be used by anyone needing regular cash flows.

With the help of an example, let us understand the working of SWP –

Investment Amount – Rs. 50,00,000/-

Investment Date – 01/01/2010

SWP Period – 01/01/2011 to 31/12/2025

SWP Amount – Rs. 25,000/- per month

Total withdrawn – Rs. 45,00,000/- ( Rs. 25,000 x 180 months)

Current Value – Rs. 1,30,13,765/-

Assumption: Fund returns 10% CAGR, SWP rate 6% annually of corpus amount / 0.5% monthly of corpus amount.

Disclaimer - Mutual Fund investment are subject to market risk, Read scheme related information before investing. Past performance is no indication of future returns. This illustration is for educational purpose.