MUTUAL FUNDS

Systematic withdrawal plan (SWP)

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A systematic withdrawal plan (SWP) is a facility which allows you to withdraw a fixed amount from your mutual fund at regular periodic intervals. The periodic intervals could be monthly, quarterly, half-yearly or annually, as per the investor’s requirement. With every withdrawal, the value of your investment in the fund is reduced by the market value of the units you have withdrawn as the withdrawal happens at that day’s NAV (Net Asset Value).

How Does Systematic Withdrawal Plan Work?

Let us understand this with the help of an example. Suppose Mr. X purchased 1,000 units of a mutual fund scheme for Rs. 1 lakh in January 2020. And, withdrew Rs. 1,000 per month for 4 months starting February 2020 via a systematic withdrawal plan.

Month Cashflows NAV No. of units redeemed Fund Units Investment Value
January Rs.1,00,000 100 0 1,000 Rs.1,00,000
February -10,000 103 97 903 Rs. 93,009
March -10,000 102 98 805 Rs. 82,110
April -10,000 105 95 710 Rs. 74,550
May -10,000 106 94 616 Rs. 65,296

So, by the end of May, Mr. X has withdrawn Rs. 40,000 total via SWP and owns an investment worth Rs. 65,296.

Benefits of SWP

1. Disciplined Investing

An SWP automatically redeems some mutual fund units every month to meet your monthly expenses, regardless of market levels. It thus, protects you from withdrawing large amounts due to panic/fear during the times of market corrections. It also withdraws money even when markets are registering new highs and thus, protects you from the impulse to invest more money during boom periods.

2. Rupee-Cost Averaging

SWPs help investors benefit when they withdraw their investments due to rupee cost averaging. Rupee cost averaging gives an investor the average Net asset value of a mutual fund over several months/years rather than making him dependant on a NAV at a single point of time.

Here is an example. An investor invested Rs. 1 lakh in a mutual fund scheme in the month of January 2020 at a Net asset value of Rs. 100. He opted for a lump sum withdrawal at the end of 5 months. Another investor bought mutual funds worth the same amount opted for a monthly SWP of Rs. 10,000 for 5 months. Here is how their investment values pan out:

Lump Sum Withdrawal Vs SWP

Lump Sum Withdrawal
Month Cashflows NAV No. of units redeemed Fund Units Investment Value
January Rs.1,00,000 100 - 1,000 Rs.1,00,000
February - 103 - 1000 Rs.1,03,000
March - 102 - 1000 Rs.1,02,000
April - 105 - 1000 Rs.1,05,000
May - 106 - 1000 Rs.1,06,000
June -Rs. 50,000 104 481 519 Rs.53,976
Systematic Withdrawal Plan
Month Cashflows NAV No. of units redeemed Fund Units Investment Value
January Rs.1,00,000 100 0 1,000 Rs.1,00,000
February 10,000 103 97 903 Rs. 93,009
March 10,000 102 98 805 Rs. 82,110
April 10,000 105 95 710 Rs. 74,550
May 10,000 106 94 616 Rs. 65,296
June 10,000 104 96 520 Rs. 54,080

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