A Systematic Withdrawal Plan (SWP) is a facility that allows an investor to withdraw money from an existing mutual fund scheme at predetermined intervals (daily, weekly, monthly, quarterly or yearly). The money withdrawn from a systematic withdrawal plan can be reinvested in another fund or it can be used as a source of regular income especially during post retirement.
The Systematic Withdrawal Plan (SWP) works exactly opposite of the Systematic Investment Plan (SIP). Under SIP, investors can accumulate their savings, whereas in SWP, they can redeem their investments periodically at the prevailing net asset value.
Investors can choose to either withdraw the capital gains on their mutual fund investments or a fixed amount. The withdrawal amount can be used to re-invest in some other schemes or can be retained by investors in the form of cash.
SWP works best when investors have financial goals like children’s education and marriage, retirement planning, and more. However, investors can also utilize SWP benefits for various other pay-out requirements.
Let’s understand SWP with an example.
A unitholder has accumulated 10000 units of a Multi Cap Fund Cap till January 2020. He gives instructions for SWP of Rs 5000 at the end of every month.
Let’s say the NAV in February 2020 was Rs 50.
Therefore, number of units required to redeem Rs 5000 = 5000/50 = 100 units
Then, at the end of February, the unitholder will have 10000-100 = 9900 units
Let’s say the NAV in March 2020 was Rs 40.
Therefore, number of units required to redeem Rs 5000 = 5000/40 = 100 units
Then, at the end of March, the unitholder will have 9900-100 = 9800 units
