Systematic Withdrawal Plan (SWP) is a service offered by mutual funds which provides investors with a specific amount of payout at a pre-determined time intervals, which can be monthly, quarterly, half-yearly or annually. An investor can customize the cash flows as desired; he can either withdraw a fixed amount or just the capital gains on his investments. SWP provides the investor with a regular income and returns on the money that is still invested in the scheme.
There are two types of SWP: Fixed Withdrawal and Appreciation Withdrawal. In a fixed withdrawal option, the investor specifies the amount he wants to withdraw from his investment on a monthly/quarterly basis. And in an appreciation withdrawal option, the investor withdraws only the appreciated amount on a monthly/quarterly basis.
As in Systematic Investment Plan where one invests a fixed amount of money in a fixed interval, say every month, in a mutual fund—in case of a SWP, an investor would withdraw a fixed amount of money every month from a mutual fund. SWP is useful when one wishes to create an income stream from their investments, which many retired people are taking advantage of.
You first need to select the fund, then decide the rate at which you want to withdraw the amount, you may also decide a fixed amount or can also ask for appreciation amount only. As mutual funds are not a fixed return instrument and also the withdrawal rate is as per your choice, so the total return from the structure depends on product/Mutual fund return and your withdrawal per month.
Benefits Of Systematic Withdrawal Plan:
- Regular Income – SWP helps in creating a regular flow of money from investments on a periodic basis.
- Tax Benefit – Instead of selling all the units at once, spanning 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 averages out return value.