Systematic withdrawal plans are means of withdrawing funds from a mutual fund scheme in a disciplined manner by fixing a withdrawal amount and a date of withdrawal in advance. You can use online SWP calculators to calculate the amount that you can withdraw from your mutual fund investment. Most SWPs also allow you to only withdraw the capital gains earned from a mutual fund scheme.
What is a systematic withdrawal plan and how does it work?
Just as systematic investment plans (SIPs) are ways to systematically invest money in a mutual fund scheme, SWPs or systematic withdrawal plans help you withdraw a fixed amount from a mutual fund scheme regularly. You can select the withdrawal amount and the frequency of withdrawal based on your convenience. SWPs also help you withdraw only the capital gains earned on your investment by keeping your investment amount intact. On the date set by you via an SWP, a fixed number of units from your portfolio are sold and transferred to your account.
How is the return on SWP calculated?
To come up with an efficient SWP strategy, you must have a basic idea of the investment amount, return values, tax deductions, or any other applicable penalty charges. You can use an online systematic withdrawal plan calculator to calculate your monthly income from a SWP investment. You can use a SWP calculator to know the regular cash flow throughout your SWP’s tenure. Here is the formula it uses to calculate this amount –
A = PMT ((1 + r/n)^nt-1)/(r/n))
Where ‘A’ is the final value of your investment, ‘PMT’ is the payment amount for each period, ‘n’ is the number of periods over which the compounding will happen, and ‘t’ is the tenure of your investment.
What are the benefits of SWP in mutual funds?
You can enjoy several benefits by opting for SWP in mutual funds:
- SWP investments help you generate a regular income: You can use a systematic withdrawal plan to generate a steady income stream for yourself and add to your primary income stream. Retirees and individuals looking to start a side hustle can use SWP withdrawals to start earning a fixed income regularly.
- SWP plans are extremely flexible: You can define the amount you wish to earn and the frequency of withdrawal by choosing SWPs. A SWP gives you, the investor, control over the disbursal of your returns and helps you customise these features based on your current needs.
- They offer the potential for capital appreciation: If you follow a strategic SWP withdrawal plan, you can also gradually increase your returns over time. These investments maintain value against inflation and offer the potential for capital appreciation.
- You need not pay any TDS on SWP withdrawals: If you wish to withdraw funds via an SWP, you can avail tax benefits too. You need not pay TDS (tax deducted at the source) on SWP withdrawals. However, please note that capital gains tax will be charged as per the type of the mutual fund scheme and the withdrawal amount.
- SWPs can help you practise disciplined investing: Like SIP investments, SWPs help you withdraw your returns in a disciplined manner. Doing so prevents any impulsive decisions which could lead to capital depletion.
- SWP withdrawals help you offset market volatility: You can use systematic withdrawal plans to offset market volatility too. You can redeem units at various NAVs (net asset values) and balance withdrawals during market fluctuations to mitigate your losses.
A systematic withdrawal plan helps you systematically access the returns earned through your mutual fund investments. You can earn a fixed income at regular, predefined intervals from your mutual fund investments by choosing an SWP. You can also benefit from SWPs if you wish to mitigate the impact of market volatility on your mutual fund returns. To start an SWP investment, you must select the right mutual fund scheme based on research and after comparing it with other funds, inform the AMC (asset management company) and select an SWP for your investment.