What is Systematic Withdrawal Plan (SWP)?

Systematic Withdrawal Plan or SWP is a investment option offered by mutual fund company in which specific amount is paid to investor on pre-determined intervals set by investor by selling out some units accumulated in a particular mutual fund scheme. Investor can enroll for SWP when he has sufficient units of a particular mutual fund available in his portfolio. Investor has to choose interval to get the specific amount credited to his account. In this plan investor can choose either number of units to sell out or specific amount to be withdraw by selling out accumulated units. In general, SWP can be done in two ways. In 1st way if an investor already has sufficient mutual fund units available in the portfolio then he can easily start SWP for that particular mutual fund scheme. In 2nd way if investor does not have anything in the portfolio but has lump sum amount handy which he can invest easily then investor has to purchase a mutual fund in lump sums and then he can start SWP for that particular mutual fund. Please go through below example to get more solid understanding of SWP option.

What are main advantages and highlights of Systematic Withdrawal Plan?

  • What are benefits of Systematic Withdrawal Plan (SWP)?

    • In SWP option investor can receive regular income from accumulated mutual fund units.
    • If investor already has sufficient units available then he can easily enroll in SWP for a particular mutual fund and can receive regular income where he can choose the frequency of income credit by 1 month, 2 months, quarterly etc.
    • It has got some tax benefits if capital gain is below 1 Lakh.
    • If Investor plans his SWP well then he / she can meet financial goals very easily.
    • This scheme can be easily applied to existing units under specific mutual fund.
    • SWP plan is beneficial for those who have large lump sum money handy (Such as retirement money, PPF maturity etc) and wants regular income on monthly basis from this investment.
    • More suitable for investor with large amount of money.
  • Examples of SWP option:

  • Scenario one where Investor already have sufficient mutual fund units available in his portfolio:

      Let us us consider an example in which an investor started SIP of a mutual fund A before 3 years with SIP amount as 5000 per month. So over 3 years of time investor has paid 5000 * 12 * 3 = 180,000 as principal investment amount and got 10,000 units at an average NAV of 18. (Here unit cost may vary within 3 years of time but average purchase price is 18). Now he decides to have some money on regular basis and want better tax benefits. Over 3 years mutual fund company perform very well and it's current NAV is 23.48 which in turn gave approximately 18 % return per year. So his current investment with 18 % gain is 23.48 * 10000 = 234800 with total extra money earned is 234800 - 180000 = 54800. Investor has started SWP for this mutual fund and wishes to get income on monthly basis without touching his original investment amount of 180,000 for next 2 years. So in SWP option he has to choose 54800 / 24 = 2283.34 as withdrawal amount. Thus, starting from next month investor will receive 2283.34 per month for next 2 years by selling out mutual fund units accumulated whose value is 2283.34 on the withdrawal date. Considering 23.48 as current NAV 97.25 units will be sold out automatically from investor's portfolio.

    Scenario two where Investor does not have sufficient mutual fund units available in his portfolio:

      Let us us consider an example in which an investor does not have any investment in mutual funds but he has sufficient funds available to purchase as a lump sum. In this case investor decides to purchase mutual funds worth of 100,000 and he purchased Fund A worth 50,000 and Fund B worth 50,000. See here, investor has distributed money in 2 different funds to low down risk. Now considering he got 1000 units of Fund A and 500 units of Fund B with current NAV as 50 and 100 respectively. After couple of months he decides to start SWP to both the schemes. So he decided to start SWP for amount worth 4000 per month to both the schemes. In this case from Each of the scheme units worth of 4000 will be sold on pre-determined date and the amount will be credited to investor account. Thus, investor will full fill his need of regular income on monthly basis. Advantage is more when mutual fund A, B or both performs well and as matter of fact NAV is increased for both the funds then number of units sold will automatically be lowered down. So whatever gain investor has is withdrawn keeping his capital untouched over the period of time. This is great advantage of SWP option. To see comparision on SIP, SWP ans STP please read our article by clicking on SIP vs SWP vs STP