Systematic Withdrawal Plan : Definition & Example

introduction

In our earlier article, what is SIP? we have seen that in SIP, you look at accumulating a corpus by making regular investments into a mutual fund. Whereas in Systematic Withdrawal Plan, you regularly withdraw a fixed amount of money from your fund. Your fund’s value and number of units will reduce to the extent of each withdrawal. The amount to be withdrawn and the frequency— monthly, quarterly, half yearly, or annually—are set by the investor.

definition : what is Systematic Withdrawal Plan?

Systematic Withdrawal Plan
  • Systematic Withdrawal Plan or SWP allows an investor to withdraw from his mutual fund scheme every month on an already set date. SWP is used to redeem your investment from a mutual fund scheme in a phased manner. SWP enables you to withdraw money in installments which is not possible in of a case lump sum withdrawals .
  • It can be viewed as an opposite of SIP. In SIP, we channelize our bank account savings into the preferred mutual fund scheme. Whereas in SWP, we channelize our investments from the scheme to the savings bank account. It is one of the strategies to deal with market fluctuations.
  • With SWP, we can customize the cash flow as per our requirement. We can choose to either withdraw just the capital gains on our investment or a fixed amount. This way we will not only have our money still invested in the scheme, but we will also be able to access regular income and returns. 
  • SWP is a method where you are assured of getting a fixed amount at your pre-determined frequency. The problem with other regular money options like a monthly income plans, which pay dividends, is that the amount and the frequency of the pay-outs is not fixed.
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how does SWP work?

  • It is important to note that an SWP is not the same as opening a fixed deposit account in a bank where we receive monthly interests. When we choose a Systematic Withdrawal Plan, it affects our mutual fund account as well.
  • With a fixed deposit, the corpus value is not impacted when we withdraw the interest. But in the case of a systematic withdrawal plan in mutual fund schemes, the value of our fund is reduced by the number of units we withdraw.
  • When you have a systematic withdrawal plan in place, shares of your investment are liquidated or sold as necessary to provide the stated amount of your withdrawal. If you own several mutual funds or have several sub-accounts inside a variable annuity, shares are sold proportionately to what you own. This helps keeps your overall asset allocation in balance.
  • Instead of using several funds, you can use one balanced fund and take systematic withdrawals from that. Alternatively, you can use a retirement income fund that is managed specifically for the purpose of sending you monthly income.

example : SWP

Nilesh has 5000 units in a Mutual fund scheme and he wants to withdraw ₹4000 every month as SWP.

  1. On January 1, the NAV of the scheme is ₹10 hence 4000/10=400units will be redeemed in first month giving him ₹4000.
  2. At this stage, remaining units become 5000-400=4600.
  3. On February 1, let us say NAV of the scheme became ₹20, hence 4000/20=200 units will be redeemed in second month to him giving ₹4000.
  4. At this stage, remaining units become 4600-200=4400.
  5. This process can go on till all the units get exhausted.

Key Features of Systematic Withdrawal Plan

  1. Withdrawals in SWP are treated as normal withdrawals. So, exit loads of the fund should be checked before starting an SWP.
  2. Since each withdrawal is essentially a sale of units, remember to check your tax implications on the redemption. You should start SWP only after remaining invested for at least a year in Equity funds and 3 years in Debt funds to reduce tax implications to the lowest.
  3. You cannot run a SIP and an SWP in the same fund.
  4. The number of withdrawals you can make from your fund corpus depends on the amount of withdrawal, size of your corpus and rate of the return of your fund.

when SWP Should be used?

  • When you want a fixed periodic income in your retirement years, when you don’t have any other income.
  • You are giving a fixed monthly expense to your child in hostel, out of his Education corpus.
  • You are planning for sabbatical leave and want to take care of you expenses from accumulated investments.

Who can put to use swp?

It is preferred by the person who has retired. It will help him/her to get monthly income after the retirement with minimum tax impact and maintain regular cash flow.