SWP stands for Systematic Withdrawal Plan. As the name suggests, SWP allows you to receive your investment returns periodically. You can choose to receive a fixed or variable amount at pre-determined intervals – monthly, quarterly, or half-yearly. The withdrawal plan ensures that you do not end up using your corpus amount all at once.
You can opt for SWP in two ways – you can either choose to receive a fixed amount or the investment capital gains. Suppose you choose to receive a fixed amount every month here’s how it will work.
Let’s say you hold 10,000 units of a mutual fund scheme in your portfolio. The Net Asset Value (NAV) of the units in the month of January is Rs 20. You wish to withdraw Rs 10,000 every month from your fund investment through SWP. Considering this the mutual fund house will determine the units required to be redeemed. The fund house will divide Rs 10,000 by 20 = 500 units. This indicates the fund house will have to redeem 500 units from your portfolio so that you receive Rs 10,000 in that very month.
Now the mutual fund units required to be redeemed every month will vary with changing NAV. If the fund’s NAV increases, fewer units will have to be redeemed and vice-versa. Consider the market positioning and your financial requirement to choose an appropriate SWP.
What is an SWP calculator?
Most people find it difficult to determine the withdrawal amount they will receive from their Mutual Fund investment when opting for SWP. The SWP calculator is an online tool that helps you out of this fix. The calculator provides an estimate of the amount you will receive on withdrawal.
Enter your total investment amount, expected return rate, and SWP period. The calculator will reflect the withdrawal per month in a matter of seconds. The calculator simplifies calculations and allows you to efficiently plan your finances.
The numeric results are often accompanied by a graphical representation of the data in the form of a pie chart. This facilitates better understanding.
An SWP calculator is a web-based tool that instantly calculates the final value. You should enter the necessary information such as the total investments, the monthly withdrawal amount, the expected return rate and the time. The calculator will display the results immediately. Thus, an SWP calculator does the work of calculating the final amount out of the equation and lets you know how much your investment will be able to fund you for the specified time. It also provides other benefits.
How to calculate the future value of the investment using the formula:
Assume you have invested ₹1,00,000 in a mutual fund scheme for ten years. The estimated rate of return is 10 %. The formula for calculating the future value of an investment in:
Future value = present value (1+r/100)^n
Present value = ₹1,00,000
R= estimated rate of return of 10% =10/100 = 0.1
N= duration of the investment = 10 years
FV= 1,00,000 (1+10/100)^10
FV = 1,00,000 (1.01)^10
FV= 1,00,000 (2.59)
FV = ₹2,59,374.2
So, the future value of the mutual fund investment after 10 years at an estimated rate of return of 10 % is ₹ 2,59,374.2.
This formula does not take withdrawals into account. To calculate the future value with withdrawals, the formula is even more complex
FV = PMT [(1+r/n)^nt-1)/(r/n)]
This calculation will take a long time and is complex. It is easier to use an online SWP calculator that will provide you with accurate and fast results.
This calculation will be much easier if you use an SWP calculator. Let us see a step-by-step guide to using the SWP calculator online
1) Enter the total investment value
2) Enter the withdrawal pre month
3) Enter the expected rate of return
4) Enter the specified time
5) Click on calculate. The outcome will be displayed in seconds.
The SWP calculator will provide you with the total withdrawal amount and the final value.
1) Easy calculation and accurate results of interest earned and total future value of your investment after a certain period.
2) Using the calculator does not require expertise or skill. On the other hand, using the formula by hand takes knowledge.
3) It is a straightforward process and is easily accessible to everyone online.
4) An investor can find out the best and optimal investment strategy using the calculator
5) It helps determine the surplus funds that can be used in other financial instruments as per the investor’s goals.
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SWP is an excellent option to earn a steady revenue. You get to choose the amount and frequency of withdrawals. It is ideal for investors seeking a constant source of income from their investments.
While SWP guarantees a steady source of income for retirees, it also comes with its fair share of risks. The potential benefits of an SWP are often hyped, and the relevant risks are understated. As a retiree, you need to understand how the rate of return in a mutual fund works and the withdrawals required to maintain your lifestyle after retirement. Having a combination of other securities along with an SWP is a good idea for retirees.
Dividend mutual funds are funds where dividends are given to investors who have invested in a particular scheme. These dividends are given at a specified period. Typically, profit from SWP is considered better as there is a surety of fixed pay-out, payment of compensation might not be consistent. There is no tax deducted at the source for SWP, but there is a dividend distribution tax of 10% on dividend mutual funds.
There is no tax deducted at the source for SWP, but depending on the type of scheme, capital gains tax will be charged. If you invested in an equity-oriented scheme and held the investment for less than a year, then the capital gains will be charged at 15%. If the holding period for an equity-oriented scheme is more than 1 year, then the capital gains will be taxed at 10% if the gains are more than ₹1 lakh for the year.
If the investor has invested in a debt-oriented scheme and has held the investment for less than 3 years, then the capital gains will be charged as per the investor’s tax slab. If the holding period for an equity-oriented scheme is more than 3 years, then the capital gains will be taxed at 20% with indexation.
A SWP can be used at any time, not necessarily at retirement or only for senior citizens. Any investor who wants a steady source of income can use a SWP.
The investor can choose to withdraw funds either monthly, quarterly, semi-annually, or annually.
Disclaimer: ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. AMFI Regn. No.: ARN-0845. We are distributors for Mutual funds. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Please note, Mutual Fund related services are not Exchange traded products and I-Sec is just acting as distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein mentioned are solely for informational and educational purpose.