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What Is a Systematic Withdrawal Plan 

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16 Mar 2023

When it comes to investing in mutual funds, there are two concepts that you need to be aware of - a Systematic Investment Plan (SIP) and a Systematic Withdrawal Plan (SWP). SIP is a common method used by investors to invest in mutual funds. An SWP, on the other hand, is a method used to redeem mutual funds. In this article, we’re going to delve into Systematic Withdrawal Plans and take a look at how they can benefit an investor. 

What is a Systematic Withdrawal Plan? 

A Systematic Withdrawal Plan (SWP) is a facility that allows investors to gradually redeem their mutual fund investment at certain specified intervals. Instead of redeeming your mutual fund investment outright as a lump sum, an SWP allows you to redeem it in installments. 

One of the major highlights of this facility is that you get the freedom to choose the amount and the frequency of withdrawal. Additionally, you can choose to keep the principal investment intact and withdraw only the returns generated by the fund. 

How does a Systematic Withdrawal Plan work?

Now that you’ve seen what a Systematic Withdrawal Plan is, let’s take a look at a hypothetical example to better understand the concept. 

Assume that you invested Rs. 1.5 lakhs in an equity mutual fund in 2020. The NAV at the time of investment was Rs. 100 and the total number of units purchased was 1,500. 

Now, in January 2023, the NAV has risen to Rs. 150, bringing your total investment value to Rs. 3 lakhs. Therefore, you decide to redeem your mutual fund investment through a Systematic Withdrawal Plan. You choose to withdraw Rs. 25,000 each month till the entire mutual fund investment is redeemed. 

Here’s how the withdrawals would go according to the Systematic Withdrawal Plan that you opted for. 

Month

NAV

Amount of Withdrawal

Units Redeemed 

Units Remaining

Value of the Fund 

January 

Rs. 150

Rs. 25,000

167

1,333

1,99,950

February 

Rs. 145

Rs. 25,000

172

1,161

1,68,345

March 

Rs. 148

Rs. 25,000

169

992

1,46,816

April

Rs. 152

Rs. 25,000

164

828

1,25,856

May

Rs. 155

Rs. 25,000

161

667

1,03,385

June 

Rs. 160

Rs. 25,000

156

511

81,760

July

Rs. 156

Rs. 25,000

160

351

54,756

August

Rs. 150

Rs. 25,000

167

184

27,600

September

Rs. 147

Rs. 25,000

170

14

2,058

October

Rs. 145

Rs. 2,030

14

0

0

Due to the constant fluctuation of the NAVs, the value of the remaining funds changes each month. As you can see, by the 10th month, you’ve managed to redeem all your units systematically. 

Benefits of Systematic Withdrawal Plan 

In addition to the flexibility and freedom that it offers, the Systematic Withdrawal Plan comes with plenty of other benefits as well. Let’s take a brief glimpse at a few of them. 

1. Regular Income 

By opting for the SWP facility, you can ensure that you get income at regular intervals. This can act as a source of secondary income, allowing you to better tide over regular expenses. For instance, you can use the income to help pay for rent, thereby significantly lowering your financial burden. Or, you can choose to invest the income in a safer and less risky investment option like a bank RD. 

2. Perfect For Retirement

Most retirees don’t have a regular source of income to rely on. In such cases, taking care of their monthly expenses can get tough and may even put them under financial hardship. But by opting for a Systematic Withdrawal Plan, they can create a regular income source and use the funds to take care of their lifestyle expenses. 

3. Future Capital Appreciation

When you redeem a mutual fund, all of the units are sold. This will prevent you from enjoying future capital appreciation that the fund may have to offer by way of an increase in the NAV. But with an SWP, since you only redeem a small portion of the total units each month, the remaining units benefit from future increases in the NAV. 

4. No Tax Deducted At Source 

If you’re a resident individual investor, you don’t have to pay any TDS (Tax Deducted at Source) on the amount that you receive through a Systematic Withdrawal Plan. This is a major bonus since it doesn’t add to your tax liability. 

5. Capital Protection 

With SWP, you can redeem only the gains that the fund has experienced to date. In this case, the initial capital that you invested will remain untouched and protected. The remaining capital also benefits from future capital appreciation due to a NAV increase.

Conclusion

The Systematic Withdrawal Plan is a great strategy for investors looking for a steady source of income. Also, you get to save tax since you don’t have to pay any TDS on SWP redemptions. However, If you haven’t invested in any mutual funds, now may be the right time to get into it. 

But to invest in a mutual fund, you would have to first open a demat account. Motilal Oswal offers a free 2-in-1 trading and demat account that you can apply for online from the comfort of your own home. Once you have the account up and running, you can then proceed to invest in a mutual fund of your choice or maybe even venture into upcoming IPOs. 

 

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