Investing regularly in mutual funds through Systematic Investment Plan (SIP) has become very popular in India. It helps people save money over time by putting in small amounts regularly. After saving, comes the time when you want to use the money you've saved. Systematic Withdrawal Plans (SWP) are a good way to take out money from your investments. SWP is like the opposite of SIP: instead of putting money in regularly, you take out a fixed amount regularly from your mutual funds. Keep reading to learn more about SWP, how it works, and why it's beneficial.
What is a Systematic Withdrawal Plan (SWP)?
Systematic Withdrawal Plan, also known as SWP, is a facility that allows investors to withdraw a fixed amount from a Mutual Fund scheme regularly. You can choose the amount and frequency of withdrawals. SWP can be an ideal arrangement from individuals especially retirees looking for a regular flow of income from an accumulated retirement corpus.
How SWP works?
Let's say you've saved Rs 1 crore for retirement at age 60 and invested it in a debt fund, which equals 1 lakh units at Rs 100 per unit. You've chosen SWP, withdrawing Rs 50,000 each month, and the equivalent units will be redeemed. The fund will keep doing this for the specified time. Here's what the next six months will be like:
| Month |
NAV of units (in ₹) |
SWP amount |
No. of units redeemed |
Units left |
Remaining fund value (in ₹) |
| January |
100.6 |
50,000 |
497 |
99,503 |
1,00,06,541 |
| February |
101.1 |
50,000 |
494 |
99,008 |
1,00,13,120 |
| March |
101.7 |
50,000 |
492 |
98,517 |
1,00,19,736 |
| April |
102.3 |
50,000 |
489 |
98,028 |
1,00,26,389 |
| May |
102.9 |
50,000 |
486 |
97,542 |
1,00,33,079 |
| June |
103.4 |
50,000 |
483 |
97,058 |
1,00,39,808 |
For illustration purpose only. Assuming CAGR of 7% per annum
An SWP of Rs 50,000 will provide regular income from your investments. If we maintain this arrangement for the next 30 years, you will still have a corpus of Rs 1.76 crore. This is due to the steady increase in the NAV of mutual funds, which boosts the growth of your fund value. The more the value increases, the longer the investment will last for the investor, despite regular withdrawals.
Features and benefits
- Regular income: The main perk of SWP is that it gives investors a steady income. You can choose how much money to take out whenever you need it. SWP works well for retirees or anyone who wants regular cash. It's great for planning your finances better.
- Flexibility: SWP gives you the freedom to set up automatic withdrawals just the way you want. You can pick how much money to take out and how often. For instance, you can arrange for withdrawals monthly, quarterly, or yearly as per your financial needs.
- Tax benefits: If you choose SWP, there's no TDS to worry about. Unlike with fixed deposits, where the interest you earn is taxable, with SWP, the initial installments will have more of your original investment and less of the capital gains, so you'll face lower taxes.
- Ironing out volatility: When you cash in your units, you also gain from rupee cost averaging. With regular fixed withdrawals, you balance out market ups and downs by cashing in units at different prices.
- Negates market timing: Similar to SIP, SWP helps you stay disciplined in your investments and prevents impulsive decisions. It prevents investors from withdrawing a significant portion of their investment due to market turbulence, allowing for a more stable approach to managing your money.
- Liquidity: If you need extra money, you can withdraw it from your mutual fund investments whenever you want.
Who can use SWP?
- Extra Income: Sometimes, one job's paycheck isn't enough to cover all your expenses. This is where SWP proves useful. It lets you take out a fixed amount from your mutual fund investments regularly. This gives you an additional source of income to help out with your bills.
- Retirement Savings: If you're getting ready to retire and haven't saved much, SWP can be a good choice. With SWP, you can decide how much money you want to receive each month after retiring. So when you do retire, you'll have a regular income from your investments, almost like a pension.
Also Read: Advantages and disadvantages of Mutual Funds in India
In a nutshell
Systematic Withdrawal Plan offers several benefits such as providing regular income, flexibility, tax advantages among others. SWP can serve as an additional income source or a retirement savings tool, offering financial stability in the long term.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. T&C apply.
