Benefits from Systematic Withdrawal Plan in Mutual funds

Sytematic withdrawal Plan in mutual funds

Systematic Withdrawal Plan in Mutual funds

You might be aware of the SIP (Systematic investment plan) wherein an investor invests fixed amount per month by buying the units of mutual funds and benefits with the rupee-cost average out over a period of time.  However an investor may also want to maximise his returns during his withdrawals over a period of time. The solution for this is “Systematic Withdrawal Plan  (SWP)”.

In systematic withdrawal plan, an investor would withdraw a fixed amount from his mutual fund investment in regular intervals  and gaining maximum profit over a period of time.

How it works?

An investor has 10,000 mutual fund units where the NAV is Rs 20.00 and the total value of the mutual fund units is Rs 200,000. Now with Systematic withdrawal plan he wants to withdraw Rs 5,000 every month. First month he withdraws Rs 5,000 (Rs 5,000 / Rs 20 NAV = 250 units). The balance units available would be 9,750 units @ 20.00 = Rs 195,000. Second month assuming that the NAV is Rs 20.15, the amount he withdraws is Rs 5,000 (Rs 5,000 / Rs 20.15 = 248.14 units). The balance units available are 9502.86 @ Rs 20.15 = Rs 191,462. If you observe that out of total investment of Rs 200,000, the amount withdrawn of Rs 10,000, the balance should have been Rs 190,000. However with systematic investment plan the amount of balance is Rs 191,462 thereby gaining of Rs 1,462. This example is illustrated assuming that the market is rising and hence the NAV has increased. In a growing market, systematic withdrawn plan works well.

Benefits of Systematic Withdrawal Plan (SWP)

There are various benefits of systematic withdrawal plan:

  1. Rupee-Cost averaging out in growing market: With rupee cost averaging out in growing market, the longer the systematic withdrawal plan, the more you benefit
  2. Tax advantage: In case you are withdrawing the amounts invested in mutual funds within 1 year, it attracts a short term capital gains. However with systematic withdrawal plan, the amount which you are withdrawing would be in smaller amounts and all amounts withdrawn in first year would be the capital itself. Hence it would not attract tax in case you are withdrawing through SWP
  3. Good option for investors looking for fixed income: Systematic withdrawal plan is good for investors who look for fixed income over a period of time. This is one of the best retirement plans for senior citizens who are looking for a growth in their investment and who needs fixed withdrawal amounts over a period of time.

Conclusion: Systematic Withdrawal Plan (SWP) is one of the good options who look to participate in mutual fund investments to growth their money and who wants investment withdrawal at regular period of time.

Readers, what is your opinion about Systematic Withdrawal plan (SWP)?  Please give your comments

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Suresh KP

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