Two friends, Amir and Vivek, were chit-chatting about life and how responsibilities push each of them out of their comfort zone. Amir said his salary barely suffices till the 25th of the month, and he could use an additional source of income. Vivek responded that he must try the SWP (Systematic withdrawal plan) in Mutual Funds. Amir was puzzled and said that SIP is a well-known term, but what is SWP System ? Vivek then explained that the SWP (Systematic withdrawal plan) in Mutual Funds is the reverse of SIP. In SIP, you can invest a fixed amount periodically, and in the SWP (Systematic withdrawal plan) , you can withdraw the amount periodically, maybe monthly, quarterly, annually or semi-annually. He learnt about this when they were looking for options to invest his dad’s retirement corpus. Amir wanted to understand how this would help him overcome his cash crunch.
A Systematic Withdrawal Plan or SWP from Mutual Funds allows the investor to withdraw systematically on predefined dates decided by the investor. If you are facing a cash crunch, you can withdraw as per the predetermined frequency from your mutual fund investments. The investor can determine the periodicity and the amount. This gives the investor better control over the investment for liquidity needs and prevents panic withdrawals. On each withdrawal, the market value of the units withdrawn is reduced from the value of the investment fund, and the remaining fund continues to stay invested..
Amir wanted to understand this better, so Vivek explained through the following example:
Say you have Rs. 2,00,000 in a Fund. The NAV of the fund is Rs. 200. So you hold 1000 units. The shortage of funds you wish to make good is Rs. 20,000. So you can withdraw 100 units or less.
| Month | Balance in Fund (Rs) | NAV (Rs) | Units Held | SWP scheme Amount | Units Redeemed | Balance Units |
|---|
| January | 2,00,000 | 200 | 1000 | 20000 | 100 | 900 |
| February | 1,62,000 | 180 | 900 | 20000 | 111 | 789 |
| March | 1,73,580 | 220 | 789 | 20000 | 91 | 698 |
| April | 1,67,520 | 240 | 698 | 20000 | 83 | 615 |
| May | 1,29,150 | 210 | 615 | 20000 | 95 | 520 |
| June | 1,04,000 | 200 | 520 | 20000 | 100 | 420 |
Even after withdrawing funds monthly for six months, you're left with 420 units, and the possibility of their growth persists.
The steps to set up SWP from the mutual fund scheme are as follows:
For existing Mutual Fund Investments:
● Log on to your Investment platform.
● From your existing list of funds, select the mutual fund scheme you wish to withdraw periodically from. To ensure you don't dip into the corpus, you can withdraw at a lower rate than the expected returns. For example, if the projected return is 7%, consider limiting your withdrawals to only 4-5%. This precaution ensures that you maintain and preserve a portion of your investment gains. That way, the corpus will remain untouched. Zero down on the fund and select “Start SWP.”
● Select the amount or percentage of withdrawal, periodicity and date. The bank account in which the investor wishes to receive the amount must be linked to the Mutual Fund .
For retirees who are investing their retirement corpus:
● The investment amount, the NAV and the periodicity must be determined initially. Say Mr. Batra wants to invest Rs.10,00,000 in a fund with a NAV of Rs. 20, then 50000 units will be allocated to him.
● Next, depending on the risk profile and other sources of income like pension and tax implications the retiree may decide on the type of fund.
● The last step is to decide the amount or percentage of withdrawal, periodicity and withdrawal date. These can be modified based on changes in lifestyle, inflation etc. Also, the bank account must be linked to the Mutual Fund to receive the SWP amount.
Amir was thankful for this useful information. He also learnt that there is no Tax Deduction at Source (TDS) on the SWP in Mutual Funds. However, there will be a capital gains tax subject to the tenure of holding and the type of the respective scheme. Also, due to rupee cost averaging in SWP, the gains may be higher than lump sum withdrawal. Vivek was glad that he could be of help to Amir.
Disclaimer:
The information herein is meant only for general reading purposes and the views being expressed
only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly
available information, internally developed data and other sources believed to be reliable. The
sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or
representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their affiliates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document.
Mutual Fund Investments are subject to market risks, read all the scheme related documents carefully.
