A Systematic Withdrawal Plan (SWP) is used by mutual fund investors to withdraw a certain amount from their investments regularly. People usually opt for this option as they reach their retirement years.
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It can act as a supplemental income, providing regular cash flow during retirement years, while ensuring that the mutual fund also continues to grow.
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How SWP Works
- Choose the corpus: You will need to invest your money in a lump sum mutual fund scheme. You can choose this fund based on its returns, your risk appetite and other aspects.
- Set the withdrawal: You can visit your broker or contact your mutual fund house to decide SWP amount and its frequency.
- On each withdrawal date, the fund redeems units equivalent to the required amount at the applicable Net Asset Value (NAV).
- Remaining corpus stays invested: Meanwhile, your balance corpus continues to remain in the mutual fund and can potentially grow over time.
- Withdrawals can be modified: Depending on the fund and platform, you can generally change, pause, or stop the SWP.
Factors To Consider
- Withdrawal rate: You need to ensure that your withdrawals are sustainable. Withdrawing excessively and during market downturns can impact how long your corpus will last.
- Fund selection: You need to choose funds based on your risk tolerance, investment horizon, and income requirements. Many online SWP calculators can help you understand how much corpus you will need to last a certain period based on withdrawal requirements.
- Tax implications: Capital gains tax may apply to redeemed units. As a result, while assessing your financial position, you need to consider tax and inflation implications to get a more realistic picture of your corpus' sustainability.
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While planning an SWP, you need to align the withdrawal amount with the corpus and long-term goals to ensure it lasts as per your needs.
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