Systematic Withdrawal Plan: What is SWP & How it Works

Wondering how to get regular income from mutual funds? Enter the SWP, or Systematic Withdrawal Plan. If SIP or Systematic Investment Plans helped you invest periodically, the SWPs would help you withdraw money in a stipulated manner. In this article, find out how SWPs work and how they could turn out to be some of the smart tools for your financial goals.

What is SWP?

The Systematic Withdrawal Plan (SWP) is an intelligent way to allow the money to grow even as you withdraw the required cash at regular intervals. SWP will enable you to predetermine an amount withdrawn monthly with minimum damage to your invested amount. To simplify more about what is SWP, let's look at the example below.

For Example: Ms Jaya is a business owner. To date, she has invested regularly and collected a corpus of Rs.30 lacs. The investment tenure was about to end, but she didn't want to claim the whole amount at once. The main aim of creating this corpus was securing the retirement period and maintaining the same lifestyle with regular cash flow. In this case, she was suggested to opt for SWP (Systematic Withdrawal Plan). Here, she can invest the corpus as a lump sum and start an SWP as per her choice of amount and receipt date. She invests in SWP, which is giving her the estimated annual return of 10%. Ms Jaya wants to withdraw Rs.30,000 every month.

In this case,

Total Interest earned in one year on the investment = (30,00,000 x 10)/100=3,00,000.

Ms Jaya withdraws Rs. 30,000 every month, i.e. Rs. 3,60,000 at the end of the year.

Excess amount withdrawn from the total investment= 3,60,000 - 3,00,000 = 60,000.

Balance investment = 30,00,000 - 60,000 = 29,40,000.

In this example, at the end of the year, only Rs. 60,000 is deducted from Ms Jaya's investment, considering she is getting 10% returns annually on the investment. Being invested in Mutual Fund, the corpus has the chance of growing the remaining capital of Rs.29,40,000 to recover for the reduction in principal amount. Considering this, read further to know more about the Systematic Withdrawal Plan in Mutual Funds.

What is Systematic Withdrawal Plan in Mutual Fund?

The SWP is a type of mutual fund investment where you mandate that a regular amount of money transfers from your mutual fund investment to your bank account regularly. For example, suppose you are looking for the investment option to allow your investment to grow and receive money from the corpus from time to time. The AMC (Asset Management Company) can credit the amount to your bank account on any day of the month, quarter, or year that you choose. SWP Plan generates cash flow by redeeming mutual fund scheme units at predetermined intervals. You will keep receiving the regular money through SWP for the period specified by you or until the entire balance of corpus is exhausted.

People who want to have a regular source of money in their account during their retirement days or who want a regular basis of money can opt for SWP.

How Does a SWP Work?

1. Pick your plan: Choose a mutual fund scheme you already invest in or a new one.

2. Set your income stream: Decide how much money you need regularly (monthly, quarterly, etc.)

3. Activate SWP: Instruct your fund house to withdraw that amount at your chosen intervals.

4. Units for cash: The fund sells enough units of your holding to meet your withdrawal request.  

5. Money in your pocket: The proceeds are deposited into your bank account.

SWPs keep working as long as there are units in your investment. It's a great way to generate predictable income and benefit from market growth!

Who Should Consider Systematic Withdrawal Plan?

It will be ideal for the retired person who wants to get regular income without depleting their savings fully. This will also be quite beneficial for those who need a continuous cash flow for monthly expenses or to supplement any shortfall in income. Investors seeking to manage taxes will find SWP an option to avoid big lump-sum withdrawals, as it will spread the taxable income over time. This will also be useful to those who want to gradually reduce their investments in a very disciplined manner. It offers flexibility in deciding upon the amount and frequency of withdrawal making it convenient for any individual balancing financial needs with long-term investment goals.

Types of Systematic Withdrawal Plan

Equity Mutual Funds

Equity mutual funds pool your money with other investors to buy company stocks. Like a mini-stock portfolio, they offer diversification and professional management. This helps spread risk and potentially boost returns over the long term. While stock prices fluctuate, equity funds are a good fit for those seeking growth for future goals.

Balanced Mutual Funds

Balanced mutual funds aim for stability by blending stocks and bonds. Imagine a mix of growth potential from stocks and the income and stability of bonds. This asset allocation helps manage risk while offering the chance for good returns. Balanced funds are a smart choice for investors seeking a middle ground between growth and stability for their financial goals

Debt Mutual Funds

They mainly invest in government bonds and corporate debt. Unlike stocks, these funds, offering predictable returns, have lower risk and are thus very ideal for parking your emergency fund or saving for any short-term goals. They are good especially for investors seeking regular income with the preservation of capital, having lower volatility.

Benefits of Systematic Withdrawal Plan

Systematic Withdrawal Plan is the reverse of the Systematic Investment Plan (SIP). Whereas, In SIP, you regularly invest in a mutual fund scheme. SWP provides you with regular cash flow and allows your mutual fund investment to grow. There are three good reasons to opt for the systematic withdrawal plan.

Cash flow

Investing in mutual funds and withdrawing through an SWP is a great way to build a consistent income stream. As a result, this is highly convenient and useful for those who require consistent cash flow to meet regular expenses. Investing in an SWP is thus a good idea for someone nearing retirement and who wants to get a consistent amount of money at regular intervals.

Growth of invested Corpus

When you invest in a mutual fund with the SWP option, your invested money won't be idle. Instead, the remaining invested money in the fund would continue to grow over the period.

Effortless Withdrawal

With SWP, you don't need to fill a form each time you withdraw the money. You just need to opt for the SWP, option once and the money would be credited to your bank account through an automated process on a given frequency of period with the pre-specified amount.

Additional Read - ICICI Direct: SIP Meaning & Benefits

Effective Uses of Systematic Withdrawal Plan

1. Steady Retirement Income: Produces steady cash flow to pay for expenses without going through the depletion of your savings.

2. Tax Management: Stretches out withdrawals to avoid huge taxable amounts at once.

3. Risk Reduction: Gradually shifts money from volatile investments to safer options.

4. Funding Education: Predictable cash flow to pay the school or college fees.

5. Medical Expenses: Ensures regular funds for ongoing medical costs.

6. Supplementing Income: Supplements monthly income to meet additional financial needs.

7. Financial planning: Flexibility in the way and time you take your money.

Conclusion

So, if an investor understands what a systematic withdrawal plan is in a mutual fund, they will discover that SWP is a good strategy for ensuring a steady income stream. SWP is created with the needs, interests, and financial goals of investors in mind. You can meet your financial goals without having to go through the hassle of market timing by using tools like the Systematic Withdrawal Plan (SWP). You can even start an SWP for a member of your family to help them become financially self-sufficient.

Systematic Withdrawal Plan FAQs

What Is SWP Interest Rate?

SWPs don't actually have an interest rate. They withdraw money directly from your mutual fund holdings. The return you get depends on the performance of the underlying investments in the fund.

Which Is Better SWP Or FD?

It depends! FDs offer guaranteed returns but relatively lower potential growth. SWPs from debt funds can offer potentially higher returns with tax benefits, but the returns fluctuate with the market. Consider your risk tolerance and income needs to decide

Is a systematic withdrawal plan good?

SWPs can be good for regular income and investment management. They offer flexibility and probable growth, although returns may vary. Consider your goals and risk tolerance to check whether an SWP shall suit your financial plan.

What Is the 4% SWP Rule?

The 4% rule is a general rule suggesting withdrawal of approximately 4% of your retirement savings in the first year, then adjusting these withdrawals for inflation each subsequent year. It's not guaranteed, but it's calculated to make your money last approximately 30 years.

Who Should Use SWP?

SWPs are ideal for all those investors who require a steady stream of income from their existing securities. Examples would be retirees, people nearing retirement, or persons who have long-term financial goals. This, therefore, also works well in cases of disciplined investors who are willing to avoid impulsive spends and handle their savings strategically.