What is Systematic Withdrawal Plan in mutual fund?

A SWP in mutual fund (Systematic Withdrawal Plan) is a facility offered by mutual funds that allows investors to withdraw from their investment at regular intervals. It is a convenient and flexible way to generate a regular inflow of money while staying invested in mutual funds.

Unlike a lumpsum withdrawal – where you withdraw the entire amount at once – an SWP enables you to choose the frequency and amount of withdrawal as per your requirements. This allows you to customize your income stream. For instance, you can opt for monthly, quarterly, half-yearly, or annual withdrawals, depending on your cash flow needs. Using a Systematic Withdrawal Plan calculator can help you plan your withdrawal strategy in such a way that you potentially avoid depleting your corpus too quickly. This can make it an important tool for managing your withdrawals.

Why is SWP a good investment?

Here are some reasons why an SWP in mutual funds is a good investment:

• Regular inflow of funds: SWPs allow investors to generate an income stream while keeping the rest of their investments intact. SWP in mutual funds can be a suitable option for individuals who are retired or those who want to supplement their income without liquidating their entire investment.
• Flexibility: Investors can tailor the frequency and amount of withdrawal as per their cash flow requirements.
• Budgeting: SWPs enable investors to plan their expenses and manage their cash flow effectively.
• Preserve capital: SWPs generate inflow of funds without liquidating the overall investment, thus preserving some portion of capital invested for future growth potential.
• Retirement planning: SWP for retirement planning are the ideal investment option for individuals who are retired or those who want to supplement their income after retirement.

Overall, SWPs offer flexibility, helps in budgeting and staying invested, making them a popular option for investors.

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 does an SWP work?

• When an investor opts for an SWP, the mutual fund units are redeemed, and the proceeds are credited to the investor's bank account as per the chosen SWP frequency (monthly, quarterly, half-yearly, or yearly).
• The SWP amount can be fixed, or it can be a percentage of the investment value. The investor can choose the frequency and amount of withdrawal as per their requirements.
• The amount of SWP is deducted from the investor's mutual fund investment, reducing the number of mutual fund units held. The value of the remaining mutual fund units may fluctuate based on market conditions.
• If the value of the mutual fund investment appreciates, the balance will increase accordingly, and the investor will continue to receive a fixed amount of SWP every month till such investments is held with the concerned mutual fund scheme.
• However, if the value of the mutual fund investment depreciates, the number of mutual fund units held will reduce, and the amount of SWP may also decrease.
• Investors can choose to stop the SWP or make changes to the SWP at any time by submitting a request to the mutual fund house.

To conclude, an SWP can be a suitable investment option for those looking for a regular inflow of funds while staying invested in mutual funds. It provides flexibility and convenience in managing cash flow and budgeting for expenses. Now that you know the SWP meaning and its benefits, make sure to use this feature to manage your finances wisely.

Conclusion

SWP combines the growth potential of mutual funds with the ease of systematic withdrawals. However, like any other investment decision, the suitability of SWP depends on your financial objective and risk tolerance.

FAQs:

Is it safe to opt for SWP in mutual funds?

SWP in mutual funds can be an option for investors looking for a regular inflow of funds, 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 a few risks involved with starting an SWP, such as the possibility of market volatility affecting the value of the mutual fund units, which can hamper the pay-out. Additionally, the mutual fund may also have fees and charges that can affect the pay-out.

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

SWP should not be started right from the day 1 of investment and should be initiated at a later stage so that the risk of capital getting eroded is reduced.

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.

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 .

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 an 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.