Everything about Systematic Withdrawal Planning (SWP)

Depending on your financial situation, you might feel the need for a regular cash flow in your account. Perhaps you are retired, or simply need a source of income without liquifying your investments in one go. If you have invested in an ongoing mutual fund, you can achieve this with a systematic withdrawal plan or SWP in a mutual fund.

In this article, we will explore how SWP works, and how you can make the most of your SWP scheme.

What is SWP meaning in mutual funds?

When you opt for an SWP, you periodically receive your own money from your ongoing investment by redeeming some mutual fund units. Meanwhile, you keep gaining from the mutual fund units you still hold.

Thus, an SWP is an effective tool to generate regular income from your mutual fund schemes. At the same time, you earn returns on the units you hold.

How does SWP work?

Here is an example that will help you understand how a systematic withdrawal plan in a mutual fund works.

Suppose you invested Rs. 1 lakh in a fund in July 2021. At the time of purchase, the NAV (net asset value) of each fund unit was Rs. 100.

Number of units you purchased = 1,00,000/100 = 1,000 units.

Then, you start an SWP where you want to withdraw Rs. 10,000 every month, for the next four months.

Now, to generate Rs. 10,000, your AMC or fund house will redeem a certain number of units, depending on the current NAV. So, your withdrawals will be as follows:

So, by the end of November, you have withdrawn Rs. 40,000 and have Rs. 65, 296 invested in the

fund. You also hold 616 mutual fund units.

Note that your unit balance reduces with each instalment of your SWP, meaning you sell mutual fund units to obtain money in your account. But, if the NAV rises faster than your withdrawal rate, you can continue your SWP and still see appreciation in your remaining units.

Benefits of choosing SWP

Here are the top three benefits of choosing an SWP:

• Rupee Cost Averaging: When you redeem units in instalments, you benefit from Rupee Cost Averaging. If you sell all your units, i.e., make a lump sum withdrawal when markets are down, you can miss out on profits. But, when you opt for an SWP, only a certain number of units are redeemed periodically. So, the market can be low or high on the redemption date. Lesser units will be redeemed for the same amount in a high market as compared to a low one.
• Investment discipline: When you have an SWP in place, you can prevent panic selling when markets show downward trends.
• A regular source of secondary income: Investing in mutual funds and withdrawing via an SWP is an effective way to establish a regular source of secondary income to help you in times of financial need.
• Better than dividend option: Some people believe that investing in an IDCW mutual fund (earlier known as the dividend option) will yield regular income. While it is true that you can earn money through dividends, these returns are not consistent. What this means is that there is no guarantee that you will earn dividends regularly and you won’t know how much money you will earn. On the other hand, an SWP gives you the assurance of earning a fixed amount at regular intervals. Plus, you always have to pay a flat 10% TDS on dividend earnings but you are only taxed on capital gains when you opt for an SWP. This makes SWP a better option than dividends.

Ready to earn a regular cash flow?

Start a systematic withdrawal plantoday with Tata Capital’s Moneyfy app.

On Moneyfy, you can discover India’s top-rated mutual funds which suit your need the best. SWP plans can be started through the app and stopped or modified as needed. When you can manage your portfolio, invest, and withdraw right with your smartphone, what are you waiting for!

Download the app and complete the online KYC and be investment-ready in just a few days. Then, you can set your financial goal, assess your risk profile, and let the app recommend you the best SWP mutual fund options. For more information, you can visit the official Moneyfy website and explore our goal-based investment tools.