Mutual funds offer a systematic investment plan (SIP) to help investors systematically invest. But what if you want to withdraw systematically? As a mutual fund investor, do you have that option? Well, the answer is yes.
You can opt for a Systematic Withdrawal Plan (SWP) to ensure you get a regular income from your mutual fund investments. Like SIP helps you invest consistently, SWP allows you to withdraw a fixed amount at regular intervals, providing a steady income stream.
What is a SWP?
A Systematic Withdrawal Plan (SWP) helps you withdraw your investments from a mutual fund scheme in a regular and planned manner. It lets you choose how much you want to withdraw and how often, usually monthly. Once you set up an SWP, the fund house will redeem the necessary units from your mutual fund holdings and credit the amount directly to your bank account. It is the opposite of SIPs (Systematic Investment Plans), where you invest money regularly instead of withdrawing it.
The most significant advantage of a SWP is that it provides a steady income stream, making it particularly useful for those who need regular income from their investments. Plus, with SWP, you are selling only some of your investments at a time, which can be risky if the market isn't performing poorly. This way, you can ensure a consistent cash flow without exposing your entire investment to market volatility all at once.
How Does a SWP Work?
Here's a step-by-step explanation of how it operates:
1. Select the Withdrawal Amount: ​​​​​​​​​​​​​
Decide how much money you want to withdraw each time. This amount can be fixed or vary based on your needs.
2. Choose the Frequency:
Determine how often you want to make withdrawals like monthly, quarterly, or annually.
3. Set Up the SWP:
Once you've decided on the amount and frequency, you instruct your mutual fund house to set up the SWP. This can usually be done online or through your financial advisor.
4. Fund House Redeems Units:
On the specified dates, the mutual fund house will redeem the required number of units from your investment to match the withdrawal amount. The number of units redeemed depends on the present Net Asset Value (NAV) of the fund.
5. Credit to Your Bank Account:
The redeemed amount is then credited directly to your bank account, providing you with a regular income stream.
Example:
Let's say you have invested Rs 5,00,000 in a mutual fund and want to withdraw Rs 10,000 every month. On the specified date, if the NAV of the mutual fund is Rs 100, the fund house will redeem 100 units (Rs 10,000/Rs 100) from your investment. Your mutual fund balance will be reduced accordingly and the withdrawn Rs 10,000 will be deposited to your bank account.
What are the Benefits of a Systematic Withdrawal Plan (SWP)
1. Regular Income Stream:
Provides a steady and predictable income, making it ideal for retirees or those needing regular income.
2. Flexibility:
Allows you to choose the withdrawal amount and frequency based on your financial needs.
3. Market Risk Management:
Reduces the risk of having to sell all investments at a market low, as withdrawals are spread out over time.
4. Tax Efficiency:
Can be more tax-efficient than lumpsum withdrawals, especially in debt funds where long-term capital gains tax can be lower.
5. Capital Preservation:
Especially with appreciation withdrawal plans, the principal amount can be preserved so you will be earning interest on them.
6. Customisable Withdrawals:
Can adjust the withdrawal plan to suit changing financial circumstances.
​​​​​​​Conclusion
A Systematic Withdrawal Plan is a smart choice if you need systematic income from your mutual fund investments. It offers predictability and flexibility that can be especially beneficial if you're retired or need a steady income. With an SWP, you can systematically redeem units from your mutual fund holdings, helping you manage market risks and enjoy potential tax benefits. Whether you're covering living expenses, supplementing your income, or simply managing your savings more efficiently, an SWP may be a reliable and effective strategy for you.
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