What is SWP (Systematic Withdrawal Plan) in Mutual Funds?
SWP stands for Systematic Withdrawal Plan. It is a facility offered by Asset Management companies that allows investors to withdraw a fixed amount from their mutual fund investments at regular intervals. The frequency of withdrawal can be monthly, quarterly, or yearly, and the amount can be adjusted as per the investor’s needs.
SWP is a popular option for investors who want to generate a regular income from their mutual fund investments. It can be used for a variety of purposes, such as retirement solution, child education, or debt repayment.
How does SWP work? –
When you set up an SWP, you will choose a mutual fund scheme and a frequency of withdrawal. The mutual fund house will then sell a certain number of units from your investment portfolio on a regular basis, and the proceeds will be transferred to your bank account.
The amount of units that are sold will depend on the NAV (Net Asset Value) of the mutual fund scheme on the day of withdrawal. For example, if you have set up an SWP to withdraw Rs. 10,000 per month, and the NAV of the mutual fund scheme is Rs. 100 on the day of withdrawal, then 100 units will be sold.
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Benefits of SWP :
There are many benefits to using SWP. Some of the key benefits include:
Regular Income: SWP can provide you with a regular income stream, which can be used to meet your living expenses, pay off debt, or save for a specific goal.
Reduced Risk: SWP can help to reduce the risk of market volatility. By withdrawing a fixed amount at regular intervals, you are not exposed to the risk of the market falling just after you have withdrawn money.
Maximized Returns: SWP can help you to maximize your returns over the long term. By withdrawing a fixed amount at regular intervals, you are able to take advantage of rupee cost averaging. This means that you will be buying more units when the market is low and fewer units when the market is high.
Tax-efficient Withdrawals: With SWP, you can withdraw a predetermined amount regularly from your mutual fund investment. By structuring your withdrawals strategically, you can potentially manage your tax liability more efficiently. Instead of withdrawing a lump sum, which may lead to a higher tax burden, spreading out withdrawals over time can help optimize your tax situation.
Load Free Withdrawals: Mutual funds which offer load free withdrawals this results no extra cost to the investor by automating regular withdrawals without incurring any additional fees or charges, you can avoid impulsive or emotionally-driven decisions when it comes to timing and the amount of your withdrawals.
Drawbacks of SWP:
There are a few drawbacks to using SWP. Some of the key drawbacks include:
Market Timing: If the market falls just after you have set up an SWP, you may have to sell units at a loss.
Exit Loads: Some mutual funds charge exit loads if you withdraw your money before the lock-in period is over.
When choosing a mutual fund for SWP, there are a few factors you should consider:
Fund Type: You should choose a fund that is suitable for your investment goals and risk appetite. For example, if you are looking for a regular income stream, you may want to choose a debt fund.
Fund Performance: You should choose a fund that has a good track record of performance. You can check the fund’s performance over different time periods to get an idea of how it has performed in the past.
Fund Fees: You should choose a fund that has reasonable fees. The fees will impact your returns, so you want to choose a fund with fees that are as low as possible.
How to set up an SWP –
To set up an SWP, you will need to contact your mutual fund distributor. They will be able to help you choose a fund and set up the withdrawal plan. You will need to provide them with some basic information, such as your bank account details and the amount you want to withdraw.
Here is a table comparing SWP with SIP:
|Purpose||To invest money regularly||To withdraw money regularly|
|Frequency||Monthly, quarterly, or yearly||Monthly, quarterly, or yearly|
|Amount||Fixed amount||Fixed amount|
|Benefits||Forces you to invest regularly, helps to average down your cost, and can help you achieve your financial goals||Provides a regular income stream, helps to reduce the risk of market volatility, and can help to maximize returns over the long term|
|Risks||You may have to invest at a high price, you may have to pay exit loads if you withdraw your money before the lock-in period is over, and you may not achieve your financial goals if the market performs poorly||You may have to sell units at an inopportune time, which could lead to lower returns, and you may have to pay exit loads if you withdraw your money before the lock-in period is over|
SWP is a versatile investment tool that can be used to meet a variety of financial goals. It is a good option for investors who want to generate a regular income from their mutual fund investments. However, it is important to understand the risks and benefits before investing.
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