What is a Systematic Withdrawal Plan (SWP)?
A Systematic Withdrawal Plan (SWP) is a financial investment strategy that allows you to withdraw a fixed amount of money from your investment portfolio at regular intervals. SWP is a facility offered by investment products, like Unit Linked Insurance Plans (ULIPs) and mutual funds. It enables you to take out a predetermined amount of money at regular intervals, which can be monthly, quarterly, or annually, from your market-linked investment funds.
This strategy helps individuals to achieve two main goals simultaneously:
- Consistent Cash Flow: It ensures a reliable and consistent income stream.
- Investment Growth: It maintains the potential for your remaining funds to continue growing.
Because it generates a regular income stream without requiring the taking out the entire investment, SWP is considered an ideal option for retirees or anyone seeking a consistent cash flow.
Example of How a Systematic Withdrawal Plan Works
Let's assume you have a lump sum invested, and you set up an SWP to withdraw ₹12,000 per month.
| Time Period |
Fund's NAV (Price per unit) |
Fixed Withdrawal Amount |
Calculation (Amount / NAV) |
Units Redeemed (Sold) |
Remaining Units in Fund |
| Initial Corpus |
₹20.00 |
N/A |
N/A |
N/A |
10,000 units |
| Month 1 |
₹24.00 (NAV Rises) |
₹12,000 |
₹12,000 / ₹24.00 |
500 units |
9,500 units |
| Month 2 |
₹20.00 (NAV Falls) |
₹12,000 |
₹12,000 / ₹20.00 |
600 units |
8,900 units |
| Month 3 |
₹30.00 (NAV Rises Highly) |
₹12,000 |
₹12,000 / ₹30.00 |
400 units |
8,500 units |
| Month 4 |
₹15.00 (NAV Drops Significantly) |
₹12,000 |
₹12,000 / ₹15.00 |
800 units |
7,700 units |
Observations:
- Fixed Income Stream: No matter what happens to the market, you receive the ₹12,000 you planned for your expenses. This provides a reliable income stream.
- Market-Linked Redemption:
- In Month 1 and Month 3, when the market performed well and the NAV was higher (₹24.00 and ₹30.00), the fund had to sell fewer units (500 and 400) to generate ₹12,000. This is the ideal scenario, as more of your principal investment remains invested for future growth.
- In Month 2 and Month 4, when the market fell and the NAV was lower (₹20.00 and ₹15.00), the fund had to sell more units (600 and 800) to generate the same ₹12,000. This is the main risk: if the market declines consistently, the corpus can be depleted faster.
What are the Features of a Systematic Withdrawal Plan?
The key features of a Systematic Withdrawal Plans are as follows:
-
Regular Income: SWP plan allows you to receive a predetermined amount of money at regular intervals. This feature provides a reliable income stream.
-
Flexibility: Plan offers the flexibility to choose the withdrawal frequency and the amount to be withdrawn as per your needs.
-
Investment Continuity: With an SWP, the remaining funds in the investment portfolio continue to be invested. You still have the potential to benefit from market returns and the growth of their investments
-
Diversification: SWP enables you to diversify your income sources. This allows you to spread your risk and potentially enhance your overall portfolio performance.
SIP Calculator
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₹22.4 L
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13.07%
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15.49%
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21.05%
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15.77%
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14.59%
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18.41%
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11.7%
Equity Top 250 Fund
14.1%
Future Apex Fund
11.99%
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14.47%
Pension Enhanced Equity
How Does a SWP Work?
Let us learn the working process of an SWP plan from the list mentioned below:
Step 1: Set an Investment Portfolio
Your portfolio may include various financial instruments like,
The portfolio is designed to generate potential returns over time.
Disclaimer: “Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by an insurer.”
Step 2: Withdrawal Parameters
You can determine the following withdrawal parameters for the SWP:
Step 3: Calculation of Withdrawal Amount
Based on your chosen withdrawal amount and frequency, the SWP provider calculates the total amount to be withdrawn from the investment portfolio for each withdrawal interval.
The amount is fixed as per the following factors:
You can use an SWP calculator to calculate your withdrawal amount and maturity returns.
Step 4: Execution of Withdrawals
The SWP provider initiates the withdrawal from the investment portfolio at each predetermined interval and transfers the specified amount to the investor's designated account.
Step 5: Investment Continuity
The remaining funds in the investment portfolio continue to be invested according to the investor's chosen investment strategy.
Step 6: Monitoring and Adjustments
You can monitor the SWP and the performance of the investment portfolio. Adjust the withdrawal amount, frequency, or investment strategy to align with changing financial goals, market conditions, or personal circumstances.
How to Calculate Your Returns on the Plan?
To calculate returns on your SIP investments, you can use the SIP calculator, which is a tool available online. The SIP calculator simplifies the process of calculating the returns on your investments, enabling investors to make informed decisions about their financial goals and investment strategies.
What are the Benefits of a SWP?
There are several benefits of buying a SWP as part of your investment strategy, which are as follows:
-
Cash Flow Management: Efficient cash flow management as you can plan and budget your expenses effectively. This ensures that you have the necessary funds available without liquidating your entire investment.
-
Market Timing: Instead of trying to predict market movements and selling investments all at once, SWP allows you to systematically sell a portion of your investment holdings at regular intervals. This approach can help smooth out the impact of market volatility and poor investment decisions.
-
Disciplined Approach: SWP encourages a disciplined investment approach as you commit to a predetermined withdrawal schedule. This helps you to stay focused on your long-term investment goals and avoid impulsive decisions.
-
Good option for Retirees: SWP is an ideal option for your retirement as it helps in redeeming regular cash flow from your existing or current investments.
-
Reinvestment Potential: SWP allows the opportunity to reinvest excess funds in other investment options. This will enable you to potentially benefit from market growth by consistently reinvesting your surplus funds, maximizing the overall return potential.
-
Tax Benefits: TDS is not deducted on SWP withdrawals, unlike on SIP Investment. But, capital gains will be taxed as per the withdrawal amount and type of scheme.
Here are capital gains tax for various mutual funds:
| Types |
Equity Mutual Funds |
Balanced Mutual Funds |
Debt Mutual Funds |
| Capital gain tax – Short term |
15% |
15% |
According to tax slab |
| Capital gain tax – Long term |
10% without indexation |
10% without indexation |
20% after indexation |
**SWP calculator can be used to estimate how much investor can withdraw from his/her lump sum investments.
What are the Risks Involved in a Systematic Withdrawal Plan?
Here are some of the risks associated with SWPs:
-
Market volatility: The value of the units in the mutual fund can go down, which could lead to a reduction in the amount of withdrawn money.
-
Withdrawal charges: Some mutual funds charge withdrawal charges, which can reduce the amount of money available for withdrawal.
-
Inflation Risk: If the withdrawal amount remains fixed over time, the purchasing power of the income stream may diminish as inflation erodes the value of money. It is essential to consider adjusting the withdrawal amount periodically to keep pace with inflation.
-
Liquidity Risk: Once funds are invested in an SWP, they may not be readily available for unexpected expenses or emergencies.
-
Tax Implications: Withdrawals made through SWP may have tax consequences.
In Conclusion
A Systematic Withdrawal Plan (SWP) offers several benefits, including regular income, cash flow management, and a disciplined approach to investing. However, it also comes with risks like market volatility, inflation, longevity, liquidity, tax implications, and dependence on investment performance. Therefore, it is crucial to understand the risks involved before making a decision.
