Systematic Withdrawal Plan (SWP) is an investment solution offered by mutual funds, whereby you can draw fixed amounts from your mutual fund investment at regular intervals (e.g. monthly). SWP works by redeeming the required number of units at prevailing NAVs to meet your SWP cash-flows. The SWP will continue as long you have sufficient unit balance to meet your cash-flows.
Suppose, you invested Rs 50 Lakhs in a mutual fund scheme at a NAV of Rs 100 per unit on 1st January 2020. You started a SWP of Rs 30,000 per month (SWP payment to be made on 1st day of the month) starting 1st February. The table below shows the cash-flows for the hypothetical NAV movement and the change in value of your investment. You can see that your unit balance will diminish over time. However, if the scheme return over the SWP period is higher than the withdrawal rate, the value of your investment can grow over time.
Mutual fund schemes, especially hybrid schemes, paying regular monthly dividends have been very popular with investors who want regular cash-flows for several years. However, investors should also consider SWP for the following reasons:-
Let us assume, you invested Rs 20 lakhs in a hypothetical Aggressive Hybrid Fund whose portfolio comprises of 65% Nifty 50 TRI and 35% Nifty 10 year benchmark G-Sec Index on 1st June 2010. You began a SWP of Rs 10,000 per month from 1st June 2011 and continued till 31st May 2021. We are starting our SWP a year after our investment to avoid exit load and short term capital gains tax. The results of the SWP are shown below. You can see that, despite substantial withdrawal, you were able to see significant capital appreciation.
SWP is a tax efficient investment option for getting regular fixed cash-flows from your investments. We have discussed in this article, why Aggressive Hybrid Funds may be well suited for SWP over long tenures. However, you must be prudent in planning your SWP and ensure that your withdrawal rate is reasonable. If your withdrawal rate is very high then you may not be able to continue your SWP for very long. Investors should consult with their financial advisors in planning SWPs for their regular cash-flow needs.
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