SWP is short form of Systematic Withdrawal Plan. You can calculate an amount you can withdraw regularly and the frequency at which you can withdraw if you invest lump sum in a mutual fund. The amount of withdrawal may be fixed or variable and withdrawal could be annually, half-annually, quarterly or monthly.
Benefits of Systematic Withdrawal Plan
- Basic benefit of systematic withdrawal plan is that your money be invested and you are also able to have regular income and return on your investment. Periodic income allows you to overcome your some needs of cash.
- Withdrawal from this plan is redemption and is not subject to tax deduction at source. However capital gain tax is liable on withdrawal.
- You have an option to set such a withdrawal amount that is only capital appreciation on investment. So you can keep the capital invested with benefit of regular income from investment.
- Generally fixed deposit or any other fixed income instruments do not offer protection against inflation. Your principal amount is safe invested in such instruments but the income may fall short of needs in future due to rising inflation. But SWP generates return to keep up with inflation if your mutual fund is equity oriented.
- Systematic withdrawal plan is a good option for regular income after retirement.
Drawback of Systematic Withdrawal Plan
- Systematic withdrawal plan affects your mutual fund. It is not the same as fixed deposit account. In fixed deposit account, you receive monthly interest but value of fixed deposit will be unaffected while in SWP in mutual fund, the value of your mutual fund is reduced by the number of units you withdraw.
Example:
You have 10,000 units in mutual fund scheme. You have instructed to the Mutual fund trust that you want to withdraw Rs. 10,000 per month.
On January 1, the NAV of the scheme is Rs 10.
Hence, the equivalent number of mutual units = Rs 10,000/ Rs 10 = 1000
1000 units are redeemed and Rs 10,000 will be given to you.
Your remaining units will be 9000 now.
On February 1, the NAV is Rs 20. The equivalent number of units = 500
These units will again be redeemed and Rs 10,000 will be given to you.
Again 500 units will be redeemed and you have balance of 8500 units remain with you.
- At time of market correction or in trend of bear market, SWP faces the reverse effect of rupee cost averaging and lower your overall internal rate of return (IRR).
SWP Calculation
You need initial investment amount, investment date, SWP starting date, SWP ending date and SWP frequency like monthly or quarterly etc as input data.
When you enter input data in proper column, you will get a detailed table which shows you following details:
NAV in Rs
Units transacted o
Balance unit
Cost of investment (original NAV)
Profit
Tax