Unlike SIP, very few are aware about SWP (Systematic Withdrawal Plan). An SWP is like a reverse Systematic Investment Plan (SIP), wherein you withdraw small and regular amounts from a lump sum investment into mutual funds.
SWP is a smart way to plan for your future needs by withdrawing amounts systematically from your existing portfolio either to reinvest in another portfolio or to meet your expenses. It is suitable for retirees who are looking for a fixed flow of income. So, let's understand how it works.
How does it work?
Let's assume, you have plaaned your retirement by Investing through SIP. And your aacumulated units are 10,000. Or you have simply bought 10,000 units buy investing lump sum amount that you have received after your retirement.
Now, you hold 10,000 units of a mutual fund scheme. You have instructed your fund house to credit Rs. 5,000 to your bank account every month through SWP.
Consider the NAV of the scheme to be Rs 10 right now. So, withdrawing Rs 5000 from the scheme implies selling 500 units (Rs 5000/Rs 10). After doing a withdrawal, your mutual fund account will have 7500 units (8000-500).
If in the beginning of the next month, the NAV of your scheme is Rs 20. Then, withdrawal of Rs 5000 amounts to selling 250 units (Rs 5000/Rs 20). Your mutual fund account will be left with 7250 units (7500-250).
In this way, the number of units keep declining with each withdrawal. An increase in the NAV would require redemption of lesser units and vice-versa.
This way you will keep receiving money every month and at the same time due to increase in unit prices you will get the benefit of capital appreciation.
Keep this in mind
Although an SWP gives you regular income and saves on taxes in the long term, you cannot open an SWP on a scheme where you have an ongoing SIP. Also, fluctuations in returns can hit your investment and SWP. In a falling market, an SWP can eat into your principal. But some financial planners recommend SWP in balanced funds as typically these are less volatile than pure equity funds.
You also need to be mindful of the fact that the fund’s exit load may also apply to the SWP. It can be in the range of 0.25-2%, if applicable and depending upon holding period.