MUTUAL FUNDS (Wealth Management)

Information About SWP

Systematic Withdrawal Plan (SWP) is the withdrawal of fixed amount of money from an investment on a periodic basis. Well, as per the fundamentals, mutual fund investments should be withdrawn over period of time; and never on a lump sum basis.

This helps to take advantage of the sales price averaging. It works on the same principle as Cost Averaging. Average sales price will work out to be higher if withdrawn in a periodic manner than in one-time withdrawal.

Systematic Withdrawal Plan Options

There are 2 types of Options available in Systematic Withdrawal Plan –

1) Fixed Withdrawal

In this case, a fixed amount of money is withdrawn every month by redeeming the required number of units, which is based on the NAV of the mutual Fund at the time of withdrawal.

Example: 1000 units are present in the mutual fund and the NAV in the current month is 10. The withdrawal amount requested is Rs. 900. Hence, 90 mutual fund units will be redeemed to fund the withdrawal.

2) Capital Appreciation

Here, a certain percentage of the capital appreciation is withdrawn on periodic basis. If the fund appreciation does not match the requested withdrawal amount, then payment in that period will be withheld and pay-out will be made in the subsequent period. Generally, growth funds are preferred for this option.

Example: For a quarterly Systematic Withdrawal Plan, the withdrawal requested is Rs. 500. If the capital appreciation has been Rs. 600 and 90% of capital appreciation is permitted, then Rs. 540 will be deposited in the investor’s bank account at the end of Q1.However, due to the downturn in markets, if the capital appreciation in Q1 is only Rs. 450. Thus, the payment will be withheld and paid in Q2 along with payout for Q2 i.e. Rs. 450 + Rs. 540= Rs. 990.

Key Benefits of Systematic Withdrawal Plan

  1. Money when you need it

Systematic Withdrawal Plan allows account holder to access their money exactly when they need it. This helps individuals to achieve their financial goals.

  1. Regular Income

It allows investor to withdraw money on a periodic basis. Thus, investors do not need to withdraw everything at once. This way, Systematic Withdrawal Plan helps achieve a higher average sales price. Also, timing the market is not necessary to ensure that best sale price is available.

  1. Tax Advantage

Systematic Withdrawal Plan offers tax advantage as long term capital gains have a lower tax rate. Tax Deducted At Source or TDS is not applicable.

Systematic Withdrawal Plan can be set up to withdraw only the capital appreciation amount. In this way, one can enjoy the gains while the capital still stays invested.

How does Systematic Withdrawal Plan work?

Nothing can be more blissful than receiving regular income to fund the day to day expenses during retirement or funding your child’s tuition fees or any other requirement. What better way to have this than start a SWP.

Let’s take a look at the following example to see on how to apply Systematic Withdrawal Plan –

Janak has 10000 units of a mutual fund X. He has availed of Systematic Withdrawal Plan option and has instructed the fund house to withdraw Rs. 5000 on the 4th of every month. In this case, fixed withdrawals are made from the capital. Following table explains how this will work-

Month and Date No of Units Available NAV on 4th Units Redeemed SWP Amount (Rs) Units Remaining
4 Jan 10000 15 133.33 2000 9866.67
4 Feb 9866.67 14.5 137.93 2000 9728.74
4 Mar 9728.74 12 166.67 2000 9562.07
4 Apr 9562.07 13 153.85 2000 9408.22
4 May 9408.22 15 133.33 2000 9274.89
4 Jun 9274.89 16 125.00 2000 9149.89
4 Jul 9149.89 16.5 121.21 2000 9028.68
4 Aug 9028.68 15.5 129.03 2000 8899.65
4 Sept 8899.65 14.7 136.05 2000 8763.59
4 Oct 8763.59 14.3 139.86 2000 8623.73
4 Nov 8623.73 14 142.86 2000 8480.87
4 Dec 8480.87 13.8 144.93 2000 8335.95


In the above table, we can see that the initial number of MF units is 10000. On Jan 4th, the NAV is 15. Thus, units redeemed to withdraw Rs. 2000 is 2000/15= 133.33. This leaves us with 9866.67 units in month of Jan. Similarly, we can see how the units are redeemed in the following months.

Initial years of an individual’s life are spent saving and investing those savings in various financial instruments like Mutual Funds, PPF, etc. It is important that these savings are available to us in times when we need really need them.

If these are available to us in a periodic manner, then that can help in planning us in meeting more regular expenses like tuition fees for children, daily expenses in retirement, payment of premium for insurance policies or any other financial purpose you can think of. SWP can help achieve all this.

It’s a matter of opening your mind and seeing where Systematic Withdrawal Plan can be really helpful to us.


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