Module 3 : Fund Facilities
Systematic Withdrawal Plan
What is SWP in Mutual Fund?
In Systematic Withdrawal Plan or SWP, you can draw a fixed amount from your mutual fund investment at a specified frequency (monthly, quarterly, annual etc.); you can specify the day of the month when the withdrawal should be made and the amount will be credited directly to your bank account on the specified day. You can continue your SWP in mutual fund as long as there are balance units in your mutual fund scheme account.Systematic Withdrawal Plan
What is SWP in Mutual Fund?
In Systematic Withdrawal Plan or SWP, you can draw a fixed amount from your mutual fund investment at a specified frequency (monthly, quarterly, annual etc.); you can specify the day of the month when the withdrawal should be made and the amount will be credited directly to your bank account on the specified day. You can continue your SWP in mutual fund as long as there are balance units in your mutual fund scheme account.
How does SWP work?
Systematic Withdrawal Plan generates cash-flows (income) for investors by redeeming units of mutual fund scheme at specified intervals. The number of units redeemed to generate cash-flows in an SWP depends on the SWP amount and the scheme Net Asset Values (NAV) on the withdrawal dates.
For example, let us assume that you want Rs 10,000 per month through SWP. Let us assume that on the first SWP date, the scheme NAV is Rs 100. The fund house will redeem Rs 10,000 ÷ 100 = 100 units to generate your cash-flow. On the SWP date, next month the scheme NAV is Rs 102. The fund house will redeem Rs 10,000 ÷ 102 = 98.0392 units to generate your cash-flow. In a SWP in mutual fund plan, your unit balance will diminish over time, but if the NAV grows at a faster rate than your withdrawal rate in the long term, then you can continue your SWP for a long period of time, as you will be redeeming less and less units for getting the same SWP amount.
Example of SWP
Let us assume you invested Rs 20 lakhs in Nifty 50 TRI on 1st January 2019, with the intention of drawing Rs 10,000 monthly through Systematic Withdrawal Plan. To avoid short term capital gains tax you began your SWP on 1st January 2020. The table below shows your SWP cash-flows, unit balance and investment value. You can see that even after drawing Rs 1.3 lakhs through SWP, the value of your investment grew by Rs 4.64 lakhs. The investment value on 1st January 2021 was also higher than the investment value on 1st January 2020, when the SWP started.
|
Date |
Index Value / NAV |
Units purchased / (redeemed) |
Unit Balance |
Cash Inflow / (outflow) |
Current Value |
|
01-01-2019 |
15,114.9 |
132.3198 |
132.3198 |
(20,00,000) |
20,00,000 |
|
01-01-2020 |
17,096.83 |
(0.5849) |
131.7349 |
10,000 |
22,52,249 |
|
03-02-2020 |
16,433.65 |
(0.6085) |
131.1264 |
10,000 |
21,54,885 |
|
02-03-2020 |
15,632.14 |
(0.6397) |
130.4866 |
10,000 |
20,39,786 |
|
01-04-2020 |
11,621.35 |
(0.8605) |
129.6262 |
10,000 |
15,06,431 |
|
04-05-2020 |
13,086.63 |
(0.7641) |
128.862 |
10,000 |
16,86,370 |
|
01-06-2020 |
13.850.00 |
(0.722) |
128.14 |
10,000 |
17,74,739 |
|
01-07-2020 |
14,707.64 |
(0.6799) |
127.4601 |
10,000 |
18,74,637 |
|
03-08-2020 |
15,388.98 |
(0.6498) |
126.8103 |
10,000 |
19,51,481 |
|
01-09-2020 |
16,227.14 |
(0.6163) |
126.194 |
10,000 |
20,47,768 |
|
01-10-2020 |
16,156.44 |
(0.6189) |
125.5751 |
10,000 |
20,28,846 |
|
02-11-2020 |
16,542.08 |
(0.6045) |
124.9705 |
10,000 |
20,67,273 |
|
01-12-2020 |
18,591.25 |
(0.5379) |
124.4327 |
10,000 |
23,13,359 |
|
01-01-2021 |
19,885.36 |
(0.5029) |
123.9298 |
10,000 |
24,64,388 |
Source: National Stock Exchange, Advisorkhoj Research (Period: 01.01.2019 to 01.01.2021). Disclaimer: The above table is purely for illustrative purposes and should not be construed as investment recommendation. Past performance may or may not be sustained in the future.
Benefits of SWP
- SWP gives fixed cash-flows to investors till the time they have sufficient unit balance in their account. Unlike mutual fund dividends, you can decide how much cash-flow you want to receive using SWP in mutual fund.
- For reasonably moderate rates of withdrawals, you can get both regular cash-flows as well as moderate capital appreciation.
- Systematic Withdrawal Plans in equity funds is one of the most tax efficient income solutions for investors. Long term capital gains of up to Rs 1 lakh is tax exempt in a financial year and taxed at 10% thereafter.