A Fortnightly Newsletter
01st January 2012
Product Focus

What is a Systematic Withdrawal Plan (SWP)

A Systematic Withdrawal Plan (SWP) is a facility that allows an investor to withdraw money from an existing mutual fund at predetermined intervals. The money withdrawn from a systematic withdrawal plan can be reinvested in another portfolio or it can be used as a source of regular income. Systematic withdrawal plans are used by investors to create a regular flow of income from their investments. Investors looking for income at periodical intervals usually invest in these funds. Often, a systematic withdrawal plan is used to fund expenses during retirement.

Systematic withdrawal plans is of advantage to investors who require liquidity as it allows account holders to access their money exactly when they need it. This makes it easier for the account holders to carry out their financial plans and meet their goals.

How does SWP work?

When you want to sell mutual fund you usually have two options either sell all at once or opt for a systematic withdrawal plan. Systematic withdrawal plan, allows you to withdraw a fixed sum of money every month or quarter depending on the option chosen and instructions given by you.

As per your instructions the Mutual fund will redeem an equivalent amount of mutual funds from your account as per the prevailing Net asset Value (NAV). This process helps investor to get a fixed amount of money every month or quarter.

Let's understand this process with the help of an example:-

Let's say you have 5,000 units in a Mutual Fund scheme. You have given instructions to the fund house that you want to withdraw Rs. 8,000 every month through SWP. Now let's assume that on 1 December, the Net Asset Value (NAV) of the scheme is Rs. 20.

Equivalent number of MF units = Rs. 8,000 / Rs. 20 = 400

400 units would be redeemed from your MF holdings, and Rs. 8,000 would be given to you.

Your remaining units = 5,000 - 400 = 4600

Now say, on 1 January, the NAV is Rs. 16.

Equivalent number of units = Rs. 8,000 / Rs. 16 = 500

500 units would be redeemed from your MF holdings, and Rs. 8,000 would be given to you.

Your remaining units = 4600 - 500 = 4100

In this way, units from your mutual fund holdings are redeemed in a systematic way to provide you with continuous income.

Under SWP, withdrawals can be fixed or variable amounts at regular intervals. These withdrawals can be made on a monthly, quarterly, semi-annual or annual schedule. The holder of the plan may choose withdrawal intervals based on his or her commitments and needs.

What are the types of SWPs?

Under SWP, withdrawals can be fixed or variable amounts at regular intervals. These withdrawals can be made on a monthly, quarterly, semi-annual or annual schedule. The holder of the plan may choose withdrawal intervals based on his or her commitments and needs.

SWP is usually available in two options:

Fixed Withdrawal: Under this you specify amount you wish to withdraw from your investment on a monthly/quarterly basis.

Appreciation Withdrawal: Under this you can withdraw your appreciated amount on a monthly/quarterly basis


Advantages of a Systematic Withdrawal Plan (SWP)

Regular income : - SWP is good way to get a fixed amount of money periodically i.e. monthly or quarterly.

Tax Benefit: - Rather than selling all the units at once, spreading the income across multiple intervals can lower the total tax. It is a tax efficient way of receiving regular income.

Avoid market fluctuations: - It saves an investor from market fluctuations, as regular withdrawal average out return value.

Conclusion

A systematic withdrawal plan allows the account holder a certain level of independence from market fluctuations. By making periodic withdrawals, account holders are able to enjoy average return values that often exceed average sale prices. In this way, systematic withdrawal plan holders are able to secure higher unit prices than those attainable by withdrawing everything at once.

References:

(1) http://www.investopedia.com/terms/s/systematicwithdrawalplan.asp#axzz1heqfedDP
(2) www.kotakmutual.com/.../systematic-withdrawal-plan-services.htm

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