Systematic Withdrawal Plan – Meaning and how it works

A systematic withdrawal plan (SWP) is a scheduled withdrawal process often used for retirement planning. SWPs can be structured in multiple ways to determine payout intervals, which can be monthly, quarterly, semi-annual, or annual.

The financial needs of every individual differ and therefore, each investor has a unique investment plan. Some investors may opt for lump sum investment while others may choose systematic investment plans (SIPs). Few investors may assume higher risk to earn potentially more returns while others are risk-averse and prefer fixed-income investments. Asset management companies (AMCs) offer multiple options to meet different investor requirements. One of these options includes systematic withdrawal plans (SWPs).

What is SWP?

A SWP allows investors to periodically withdraw a fixed amount from their mutual fund investments. The amount and frequency can be determined as per the personal requirements of the investors. Additionally, investors may opt to only withdraw the gains ensuring their capital investments stay intact.

Features of a SWP

🔹 Facility to regularly redeem mutual fund units
🔹 Allows investors to withdraw fixed amounts or only the investment gains
🔹 Investors may choose the frequency to withdraw funds

How do SWPs work?

SWPs are a good option for investors who want to earn regular income to meet their expenses. Here is how SWPs work:
🔸 Identify the mutual fund schemes to invest their funds and open an account with the AMC
🔸 Choose the mode of investment, which can either be a lump sum investment or an SIP
🔸 Set up the SWP and provide the instructions to withdraw the amount and the frequency (monthly, quarterly, semi-annual, or annual); investors also need to provide the bank account details
🔸 On the withdrawal date, the AMC will liquidate the proportionate number of units based on the amount, which is then credited to the investor’s account

The AMC continues the proportionate liquidation until the investor cancels the SWP or the end of the specified period The balance amount on the redemption of units continues to earn returns and the NAV will change as per the performance of the fund portfolio. As investors continue withdrawing the SWP amount, the capital in their accounts will decrease over a period.

Let us see an example to further understand how SWPs work. Assume an individual invests INR 1 lakh in a mutual fund new fund offering at INR 10 per unit. The AMC allots 10000 units of the said scheme. The investor opts for withdrawing INR 10000 per month. The table below shows the working for six months:

When the NAV is higher, a lesser number of units are liquidated and vice versa. Investors must consider their financial goals and personal requirements to maximize the benefits of SWPs. There is a possibility of negative effects in case investors make unplanned withdrawals from their mutual fund investments.

SWP can be an excellent and effective tool to earn regular returns on mutual fund investments. Investors can connect with SRH Wealth Management, which is a full-financial solutions provider. Our experts have a combined experience of more than five decades and ensure investors receive the most suitable investment options that appropriately suit their requirements.