What is Systematic Withdrawal Plan?
A Systematic Withdrawal Plan (SWP) is a facility that allows an investor to withdraw funds from an existing mutual fund scheme at predetermined intervals. The money withdrawn from a systematic withdrawal plan can be reinvested in another portfolio or it can be used as a source of regular income.
Investors looking for income at periodical intervals usually invest in SWP. Often, a SWP is used to fund expenses during retirement.
What are types of SWPs?
Withdrawals can be of fixed or variable amounts. These withdrawals can be made on a monthly,
Quarterly, semi-annual or annual schedule. The holder of the plan may choose withdrawal intervals based on his or her commitments and needs.
SWP is usually available in two options:
- Fixed Withdrawal - Under this you specify amount you wish to withdraw from your investment on a Monthly/ Quarterly basis.
- Appreciation Withdrawal - Under this you can withdraw your appreciated amount on a Monthly / Quarterly basis.
How does SWP work?
Let's understand this process with the help of an example: Let's say you have 5,000 units in a Mutual Fund scheme. You have given instructions to the fund house that you want to withdraw ₹ 8,000 every month through SWP. Now let's assume that on 1st December, the Net Asset Value (NAV) of the scheme is ₹ 20. Equivalent number of MF units = ₹ 8,000 / ₹ 20 = 400. Hence, 400 units would be redeemed from your MF holdings, and ₹ 8,000 would be given to you. Your remaining units will be 4,600 (5,000 - 400= 4,600).
Now say, on 1st January, the NAV is ₹ 16. Equivalent number of units = ₹ 8,000 / ₹ 16 = 500 Hence, 500 units would be redeemed from your MF holdings, and ₹ 8,000 would be given to you. So your final remaining units will be 4100 (4600 - 500 = 4100). In this way, units from your mutual fund holdings are redeemed in a systematic way to provide you with continuous income.
Watch out this space for more, next we will cover “Variable Transfer Plans (VTP) ” in our next article
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.