Your financial plan requires a comprehensive understanding of your financial goals at various stages of your life. Savings, followed by investment in the proper instruments, is a key to a successful and stress-free financial journey. Just like in the initial stages of your financial journey, you may need some schemes and a plan to grow your money, there are various stages in your life, when you may need to withdraw funds from your mutual fund investments. At such times, instead of withdrawing a chunk of money from your corpus, you may plan to withdraw funds using an SWP in mutual fund.

What is SWP in mutual Funds?

Most mutual funds in India offer the SWP or the Systematic withdrawal plan option. Using this option, you can plan a steady income for your financial goals whenever required. There is no maximum or minimum limit on the period that you can withdraw funds from a SWP in mutual fund, subject to the availability of funds in your scheme.

How does the SWP work?

Mutual Funds in India offer the option of withdrawing your accumulated funds from a pre-existing mutual fund account to your bank account. The fixed amount from your funds are transferred on the date periodically as per your chosen plan. The units of your mutual fund are redeemed at the prevalent NAV at the time of the withdrawal. Since the NAV keeps changing, the value of the units remaining in your account keeps fluctuating. If you do not want your Principal amount to deplete because of the withdrawals, you should plan to withdraw less than the expected rate of returns from your SWP in mutual fund.

For example, let us say you have 25,000 units amounting to Rs 2,50,000/- in your mutual funds in India account at NAV 10. Now you want to withdraw Rs 5,000/- monthly from this fund.  In the first month (5,000/ 10) = 500 units will be redeemed for your withdrawal of Rs 5,000/- The remaining units after the first month are (25,000- 500)= 24,500/- In the next month, say the NAV changes to Rs 15. To withdraw Rs 5,000/- the units for redemption will be 5,000/15= 333.34 units. The remaining units after this withdrawal are 24,500-333.34=24,167 units (rounded off). The total value of your investment in the SWP mutual fund after the withdrawal in the second month stands at 24,167X 15 = Rs 3,62,505/-

When should you opt for an SWP?

Steady income may be required to fund your children’s tuition fees from a pool of money you have saved up. Instead of paying the entire year’s fees you can set up an SWP in mutual funds from your invested schemes to pay the fees.

In another scenario, maybe you have a lumpsum amount of money which you would like to use to fund your EMI on a home loan. In order to earn a tax benefit from your home loan and at the same time earn a return from your lumpsum, you may plan to set up an SWP for the EMI instead of using the entire lumpsum to prepay your loan. Talk to your financial advisor or mutual fund distributor to suggest the best course of action for your specific needs.

SWP in mutual funds in India is a popular choice amongst retirees who want a steady income from their accumulated corpus for their monthly expenses.