What is Systematic Withdrawal Plan (SWP)?

If you're familiar with mutual funds, you've likely encountered the term SIP, or Systematic Investment Plan. SIPs enable regular investments into a mutual fund scheme.

An SWP, or Systematic Withdrawal Plan, is like the counterpart of SIPs, but for withdrawals. This convenient provision allows you to withdraw a predetermined amount from your mutual fund investment at regular intervals.

This article offers a detailed guide to SWPs and how they may be useful to you in potentially generating regular income or achieving a balanced approach to investment management.

• What is Systematic Withdrawal Plan (SWP) in mutual funds?
• How does Systematic Withdrawal Plan (SWP) work?
• Systematic Withdrawal Plan calculator
• Key features of Systematic Withdrawal Plan (SWP)
• How to do an SWP?
• Who should consider SWPs?
• Benefits of a Systematic Withdrawal Plan (SWP)
• How to set up a systematic withdrawal plan?
• How can you withdraw through SWP?
• How to use SWP smartly and wisely?
• Dynamic SWP strategies for changing income

What is Systematic Withdrawal Plan (SWP) in mutual funds?

Mutual funds typically offer high liquidity, which means that you can redeem all or a part of your investments whenever you need funds. Though redemptions are possible at any time, for the best outcomes, investors should only redeem their investments upon achieving the financial goal for which it was intended.

While one way to do this is to redeem all your investments at the end of your preferred investment tenure, another structured approach is through Systematic Withdrawal Plans (SWPs). Without liquidating your entire holding at once, an SWP offers a systematic way to access your investment returns. You can choose to withdraw either a fixed number of units or a fixed amount at an interval that suits you – monthly, quarterly, half-yearly, or yearly.

SWPs can potentially help provide a regular income stream. Moreover, the money that remains in the fund after an SWP withdrawal can grow if the scheme earns positive returns. Your SWPs can continue till the time that you have units in your scheme. This can potentially be more beneficial in the long term than withdrawing the money all at once.

Let’s illustrate with an example: Imagine you have Rs. 5 lakh invested in a mutual fund with an average annualized return of 12%. If you set up an SWP to withdraw Rs. 10,000 monthly, at the end of the first year, you would have withdrawn Rs. 1,20,000. Meanwhile, the fund balance, if the growth rate continues to be 12%, would be Rs. 3,80,000, and you would have earned Rs. 53,535 as returns. However, returns are not guaranteed and can fluctuate.

How does Systematic Withdrawal Plan (SWP) work?

Imagine you've invested Rs 15 lakh in a mutual fund and want to withdraw ₹10,000 every month to supplement your income. A Systematic Withdrawal Plan (SWP) is a convenient way to achieve this.

The steps

Setting up your plan: notify your mutual fund provider to initiate an SWP, specifying both the withdrawal amount (Rs 10,000 in this scenario) and the frequency (monthly).

Redemption process: Each month, the mutual fund company sells required units from your portfolio based on the current Net Asset Value (NAV) to meet the withdrawal amount.

Fund disbursement: The value of the redeemed units, in this case, Rs 10,000, are credited to your linked bank account.

Ongoing withdrawals: This process repeats monthly until you either stop the SWP or the remaining investment value is insufficient to cover the withdrawals.

Remember, as units are redeemed over time, your overall investment value may decrease. Over time, this decrease may influence the overall value of your investment.

Systematic Withdrawal Plan calculator

An SWP (Systematic Withdrawal Plan) calculator is a tool designed to help you estimate how much you can withdraw from your mutual fund investments at regular intervals, such as monthly or quarterly.

Key inputs for an SWP calculator

Initial investment amount: The total amount invested in the mutual fund scheme.

Tenure: Number of years after which you plan to start the SWP

Withdrawal amount: The amount you wish to withdraw at regular intervals.

Expected annual rate of return: The estimated annual return on your investment, which can vary with market conditions.

Withdrawal tenure: The period for which you plan to withdraw funds.

Key outputs of an SWP calculator

Future value of investment amount: How much your corpus would have grown to by the time your SWP starts

Number of withdrawals: How many withdrawals you can potentially make given the corpus size, rate of return and withdrawal amount.

Estimated remaining balance: The projected balance left in your investment account at the end of your tenure.

Total withdrawal amount: The total withdrawn amount over the specified investment duration.

Key features of Systematic Withdrawal Plan (SWP)

• Flexibility: You can customize the withdrawal amount and frequency.
• Growth potential: The balance funds can potentially continue to grow subject to positive market performance.
• Income generation: Investors can generate regular income from their investments while the SWP is active.

How to do an SWP?

A Systematic Withdrawal Plan (SWP) can be a practical and effective solution for individuals seeking a regular income stream from their mutual fund investments.

Here's a step-by-step breakdown of how an SWP operates:

1. Scheme identification: Begin by selecting the mutual fund scheme that aligns with your investment goals and risk tolerance.
2. Investment: You can either invest in a lumpsum or through a Systematic Investment Plan (SIP) . For the latter, you may choose to invest for a few years and build a corpus before starting your SWP.
3. SWP setup: Instruct the fund house or broker to establish an SWP mandate. Specify the amount you wish to withdraw at regular intervals (monthly, quarterly, or annually) and the bank account for crediting the withdrawals.
4. Withdrawal execution: As per your chosen frequency, the fund house will release the SWP amount. The money can be sent directly to your chosen bank account.
5. Ongoing process: The fund house will continue to redeem units and process withdrawals according to your chosen frequency until you decide to cancel the SWP or the investment is fully liquidated.

Who should consider SWPs?

SWPs can cater to a wide range of investor needs and preferences. Here's a look at who might find SWPs beneficial:

• Those seeking regular income: SWPs can be a suitable option for individuals who require a consistent income stream from their investments, such as retirees or those relying on investment returns for living expenses.
• Those preferring disciplined withdrawals: SWPs can help maintain financial discipline by setting a fixed withdrawal amount and preventing impulsive or excessive withdrawals.
• Those seeking a secondary income source: SWPs can create a steady secondary income stream from existing investments, supplementing your primary income and helping manage rising costs.
• Individuals without pensions: SWPs can serve as a pension plan of sorts. By investing your retirement corpus in suitable mutual funds, you can withdraw regular income at your chosen frequency. Unlike regular pensions or pension plans, however, income and returns are not guaranteed.

Benefits of a Systematic Withdrawal Plan (SWP)

• Flexibility: You can choose the withdrawal amount, frequency (monthly, quarterly, annually, etc.), and even the date for withdrawals.
• Regular income: For those requiring a consistent income stream, SWPs are a reliable solution.
• Capital appreciation potential: If the SWP withdrawal rate is lower than the mutual fund's return rate, your investment can continue to grow over time.
• Reduced market timing risk: By adhering to a disciplined withdrawal schedule, you avoid the risk of making hasty decisions based on short-term market fluctuations.

How to set up a systematic withdrawal plan?

Select a suitable fund

Performance: Ensure that the mutual fund scheme in which you plan to set up an SWP has a consistent track record. Look at the past 3-5 years’ performance, although keep in mind that past performance is not an indicator of future returns.

Risk profile: Align the mutual fund with your risk tolerance. If you are risk-averse, consider debt funds. Conversely, if you can handle market volatility, pure equity funds might be more appropriate.

Exit load: Some mutual funds charge an exit load if units are redeemed before a specific period. It is crucial to understand this aspect, as frequent withdrawals can lead to higher charges. Or you can choose a fund that permits certain portion of investments to be redeemed without exit load.

Choose the withdrawal amount

Fixed sum: This is a specific sum that you decide at the outset. It remains consistent throughout unless you make changes.

Percentage-based: Here, you choose to withdraw a percentage of your total investment or the current value. This method can be more dynamic but requires closer monitoring.

Determine the frequency

Monthly: Suitable for those who need a regular monthly income, such as retirees or individuals supplementing their regular income.

Quarterly: A good choice for investors who don't need monthly withdrawals and can wait for a quarterly pay-out.

Annually: Suitable for those with a long-term horizon and no immediate income needs. Annual withdrawals can be a strategic choice for tax planning purposes.

Initiate the SWP

This can be done either online or offline through the chosen AMC, or through a financial advisor.

Review terms and conditions

Before finalising the SWP, revisit the fund's terms and understand any charges associated with premature withdrawals. Some funds may also have restrictions on the minimum amount you can withdraw through SWP. You can also decide if you want an indefinite SWP (until you stop it or the investment depletes) or a fixed duration SWP.

How can you withdraw through SWP?

To withdraw through an SWP, you need to submit a request to the mutual fund house specifying the amount and frequency of the withdrawal. The withdrawal can be made either through direct credit to your bank account or by issuing a cheque. The amount of money you receive will be deducted from your mutual fund investment. You can consider seeking the advice of a financial expert for planning your SWP.

How to use SWP smartly and wisely?

Monitor and adjust: Always monitor your investments and the performance of your mutual funds. If you see consistent underperformance, consider stopping the SWP and switching to another fund.

Understand tax implications: The withdrawals made are subject to capital gains tax. Depending on the holding period and type of fund (equity or debt), the tax treatment can differ. It is crucial to understand these nuances to ensure that the SWP remains tax-efficient.

Reinvestment strategy: If you don’t need the withdrawn amount immediately, consider reinvesting it in another asset class or financial instrument. This way, you can potentially enhance your returns further.

Flexibility: While you might have set an SWP, always be ready to modify it based on changing financial needs. This flexibility ensures that you neither withdraw too much nor too little.

Dynamic SWP strategies for changing income

The variable nature of freelancers' and retirees' incomes necessitates the implementation of dynamic SWP strategies. Here are a few strategies tailored to these needs:

Variable SWP: Unlike the traditional SWP (where you withdraw a fixed sum regularly), a Variable SWP strategy allows you to adjust the withdrawal amount according to your monthly expenses and earnings.

Let's assume that during some months you get more freelancing projects and therefore more income. In such a scenario, you can choose to decrease your SWP amount for that month. Conversely, in months where assignments are scarce, you might need higher SWP withdrawals to meet your lifestyle needs. This flexible strategy provides real-time adaptability, ensuring that your mutual fund corpus isn't depleted too rapidly during high earning months, while you have enough money during the lean months.

Ladder strategy: Think of this strategy as diversifying your investments across different asset classes. The idea is to break your mutual fund investments into multiple parts based on your risk appetite and financial goals. Your immediate financial needs can be taken care of by debt fund investments, which tend to be relatively stable.

Longer-term needs, on the other hand, can be taken care of by equity funds. Depending on your current financial situation, you can adjust the SWP from each of these separate pools. This tactic ensures that you have liquidity when needed, without compromising on long-term growth.

Buffer strategy: This strategy involves creating an emergency fund, and is highly useful during extreme fluctuations in income. In months where your earnings surpass expectations, you can reduce your SWP amount and direct the extra income to this emergency fund.

Additionally, during months where earnings are below average, you can draw from the emergency buffer instead of increasing the SWP. This method ensures that the core mutual fund investment remains largely untouched during financial downturns, allowing it to grow and compound.

Review and reset: Given the fluctuating nature of incomes these days, it becomes essential to frequently assess the SWP strategy. At least once a year, review your withdrawals, your mutual fund's performance, and your earnings. If you're withdrawing too much, it might deplete your funds sooner than anticipated. If you're withdrawing too little, you might not be meeting your expenses comfortably or you might be missing out on potentially better investment opportunities.

Regular reviews ensure that you stay on top of your financial goals and adapt to any significant changes in your earning patterns or market conditions.

Conclusion

SWPs can complement your overall financial strategy. Whether you're looking to supplement your income, create a personalized pension plan, or manage your investments during retirement, SWPs can be tailored to your specific needs. They can offer you a reliable income stream while potentially growing your investments based on market growth. Moreover, the tax efficiency of SWPs, with no TDS on gains, adds to their appeal.

FAQs:

Which is better, SWP or fixed deposit?

Fixed deposits do not typically offer staggered withdrawals in instalments. So, SWP is more suitable between the two if you need a regular income stream. Between mutual funds and fixed deposits, the investment option that is more suitable for you depends on your risk tolerance and financial goals. If you're comfortable with some risk and seek potentially higher returns, mutual funds might be suitable. If you prioritize capital protection, fixed interest, and guaranteed returns, FDs may be preferable.

Who can use SWPs?

Individuals seeking a relatively predictable income stream, such as retirees and those seeking a secondary income, may find SWPs to be suitable.

What are SWP interest rates?

Mutual funds do not have fixed interest rates. They offer potential returns on your investment, which are dependent on the underlying mutual fund's performance. The annualized return rate can fluctuate year on year and returns are not guaranteed, but they are typically higher in the long term than bank deposits, especially for equity funds.

Is there any risk in SWP?

SWPs, while offering a steady income stream, are not without risks. Primarily, they are linked to market volatility. If the underlying mutual fund's value declines, the withdrawal amount might erode your principal. Additionally, there's a risk of outliving your investments if

Can SWP be stopped any time?

Yes, if your goals and requirements change, you can stop the SWP through a simple application process. You can go through your distributor or the mutual fund house, depending upon your investment mode (direct vs regular).

Is SWP better than SIP?

The choice between SIP and SWP depends on your financial goals, life stage, and cash flow requirements, as they serve entirely different purposes. An SIP is a way of investing in mutual funds in regular instalments, while SWP is a way of withdrawing money from existing investments in mutual funds in regular instalments. An SIP is suitable for someone seeking to invest money and potentially create wealth in the long term, while an SWP is suitable for someone seeking steady income from their investments (such as retirees).

Is it safe to opt for SWP in mutual funds?

No market-linked investment is completely safe. SWP in mutual funds can be an option for investors seeking the potential for regular income, provided they invest in a well-diversified mutual fund that aligns with their risk tolerance and financial goals.

Why may retirees not want to start an SWP right after retirement?

In case the retired individual has other sources of income such as pensions, he/she may not want to start an SWP immediately after retirement. This is because starting an SWP too early may impact their long-term financial planning.

Are there any risks involved with starting an SWP?

Yes, there are risks involved with SWP, such as the possibility of market volatility affecting the value of the mutual fund units, which can hamper the pay-out.

How can I reduce capital erosion in the case of an SWP?

To reduce capital erosion in a Systematic Withdrawal Plan (SWP), set a withdrawal amount that is line with, or slightly lower than, the expected returns of your investment. Diversify your portfolio across equity and debt to create relatively stable return potential and periodically review performance to adjust withdrawals. Also, it is advisable to build a substantial corpus through steady, long-term investing before starting the withdrawal plan.

What is the difference between SWP and STP?

SWP in mutual fund allows investor to withdraw an amount from their mutual fund investment at a regular interval, whereas STP in mutual fund allows investor to transfer an amount at regular interval from one mutual fund scheme to another run by the same fund house.

What is the difference between SIP and SWP?

SIP (Systematic Investment Plan) involves regularly investing a fixed amount in mutual funds, fostering disciplined savings. SWP (Systematic Withdrawal Plan) allows periodic withdrawals from a mutual fund, potentially providing steady income. Tools like a mutual fund SIP return calculator help estimate potential SIP returns, aiding in financial planning .

What steps should I take if my SWP isn't meeting my income needs?

If your SWP isn't providing sufficient inflow of funds, you can consider adjusting the withdrawal amount, switching to a different fund, or exploring additional income sources like part-time work or other investments.

What is the interest rate in SWP?

There is no interest rate as such in SWP. An SWP (Systematic Withdrawal Plan) is a feature provided by mutual fund companies that enables investors to withdraw a set amount of money from their mutual fund assets at regular intervals (such as monthly or quarterly). The remaining amount continues to get market exposure and can potentially earn returns. However, these returns are not fixed or guaranteed and depend upon market conditions.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.