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What is a Systematic Withdrawal Plan (SWP)?
A Systematic Withdrawal Plan (SWP) is a feature available in mutual funds and Unit Linked Insurance Plans (ULIPs). It lets you pull out a fixed sum from your investment at set intervals, whether monthly, quarterly, or once a year.
The reason many investors opt for an SWP is straightforward. You get money coming in at regular intervals, and whatever is left in your investment continues to remain in the market.
Retirees and those with recurring expenses tend to find SWP useful because it removes the need to redeem the full investment in one go, giving them income in parts while the rest stays put.
How Does a SWP Work?
A Systematic Withdrawal Plan (SWP) lets you withdraw a fixed amount from your mutual fund at set intervals. Below is a step-by-step breakdown of how it works:
- Initial Investment You put a lump sum into a mutual fund scheme. This corpus is what your withdrawals are drawn from going forward.
- Scheduled Withdrawals You choose a withdrawal amount and how often you want it, monthly, quarterly, or any frequency that suits you. Withdrawing Rs. 10,000 every month to cover regular expenses is one of the more common ways investors use this.
- Unit Redemption On the withdrawal date, the fund sells units from your holding to cover the amount due. Since the NAV shifts daily, the number of units sold each time will vary.
- Remaining Investment Stays Active The units still in your account remain invested. As the market moves, these units can appreciate in value, helping your corpus hold up against rising costs over time.
Example of How a Systematic Withdrawal Plan Works
Assumptions:
- Initial Investment: Rs. 10,00,000
- Monthly Withdrawal: Rs. 10,000
- Starting NAV: Rs. 100
| Month |
Opening Units |
NAV (Rs.) |
Units Redeemed |
Amount Withdrawn (Rs.) |
Remaining Units |
Closing Value (Rs.) |
| 1 |
10,000.00 |
100.00 |
100.00 |
10,000 |
9,900.00 |
9,90,000 |
| 2 |
9,900.00 |
102.00 |
98.04 |
10,000 |
9,801.96 |
9,99,800 |
| 3 |
9,801.96 |
99.00 |
101.01 |
10,000 |
9,700.95 |
9,60,394 |
| 4 |
9,700.95 |
104.00 |
96.15 |
10,000 |
9,604.80 |
9,98,899 |
| 5 |
9,604.80 |
106.00 |
94.34 |
10,000 |
9,510.46 |
10,08,109 |
| 6 |
9,510.46 |
103.00 |
97.09 |
10,000 |
9,413.37 |
9,69,577 |
Key Takeaways from the Table:
- Even after Rs. 60,000 is withdrawn over 6 months, the portfolio holds its ground in months where the NAV moves up.
- The units redeemed each month are not a fixed number. They shift based on whatever the NAV is on the withdrawal date.
- A higher NAV on the withdrawal date means fewer units are cut to meet the same amount, which works in favour of the remaining corpus.
Features and Benefits of the SWP Plan
An SWP offers a structured and flexible way to draw income from your mutual fund investments. Below are its key features and benefits:
- Regular and Predictable Income: SWP pays you a fixed amount at chosen intervals. For retirees or those managing fixed monthly expenses, this kind of structured payout brings a level of financial predictability to everyday planning.
- Flexibility in Withdrawals: You choose the amount and how often it comes to you. Monthly, quarterly, or annually, the plan fits around your requirements, and can be revised as those requirements shift.
- Reverse Rupee Cost Averaging: Withdrawals happen at the NAV applicable on that date. When the NAV is high, fewer units are redeemed, and when it is low, more units go. This naturally balances out the effect of market ups and downs over time.
- Remaining Corpus Stays Invested: Only the withdrawn amount leaves the fund. The rest continues to remain invested and compound over time, which works in the investor's favour over the long term.
- Tax Efficiency: SWP payouts are treated as redemptions and taxed as capital gains. This is generally more favorable compared to FD interest, which is added to your income and taxed at your applicable slab rate.
- Inflation Management: Your remaining units stay invested, navigating market shifts while you withdraw. This is vital because as living costs climb, the growth on your balance helps protect your wealth's actual value. It ensures your money keeps working in the background, defending your purchasing power against inflation rather than just sitting idle.
- Easy to Set Up and Modify: An SWP takes little effort to activate through your fund house or platform. You can raise, reduce, or stop the withdrawals at any point, with no significant penalties involved.
How to Calculate Your Returns on the Plan?
The SWP calculator on Policybazaar's website helps you plan your withdrawals. Enter your corpus size, withdrawal amount, and expected return rate to see an estimate of your payouts and remaining investment value over time.
Who Should Consider the SWP Plan?
Here are the types of investors who can benefit the most:
- Retirees and Senior Citizens: Post retirement, the salary stops but monthly costs do not. An SWP credits a fixed amount at chosen intervals, so the corpus is not exhausted in one go and continues to last.
- Long Term Investors: After building a large portfolio, the real challenge is drawing from it without ruining your long-term strategy. An SWP fixes this by providing regular payouts to cover bills or EMIs, ensuring you have steady cash flow while your remaining capital stays invested.
- Those Looking to Avoid Market Timing: Redeeming the entire amount on a single day is a gamble, since the NAV may not be in your favour. An SWP splits the redemption across months or quarters, so no single market movement has an outsized effect on what you actually receive.
- Conservative Investors in the Distribution Phase: Once the wealth-building phase is done, the focus moves to drawing from that corpus in a planned manner. An SWP fits well at this stage as it keeps withdrawals regular, while the rest of the money remains invested.
- Goal-Based Investors: Take a goal like funding your child's college education. The fees do not come all at once, they come in year after year. An SWP lets you pull out money in stages, exactly when each payment is due.
