Are you one of those investors who are looking for a regular income stream from their mutual fund investments? SWP can be a good option rather than selling a lump sum of mutual fund units which may have adverse tax implications or market timing risks.
In the following guide, we will discuss almost everything about SWPs. Moreover, some frequently asked questions will also be answered. So, let’s get started!
SWP: Full Form, Meaning & Explanation
SWP in mutual funds stands for Systematic Withdrawal Plan. It is a facility that allows investors to withdraw a specific amount of money from their mutual fund investments at regular intervals.
With an SWP, investors can choose a fixed amount or a percentage of their investment to be withdrawn periodically. The frequency of withdrawals can be monthly, quarterly, half-yearly or annually.
Related Reading: STP in mutual funds
How Does SWP Work
First of all, an investor must invest a certain amount of money in a mutual funds scheme that offers an SWP facility and desired frequency of withdrawal. After, the investor specifies the withdrawal amount & frequency.
The amount can either be a fixed sum or a percentage of the total investment. The mutual fund company then takes care of the remaining process.
At the specified intervals, AMC redeems the required number of mutual fund units and the amount is transferred to the investor’s bank account.
Note! When units are redeemed, the mutual fund company may deduct the applicable taxes on the redeemed units before transferring the withdrawal amount to the investor. Hence, investors may receive less amount than the specified amount.
Key Features & Benefits Of SWP
An SWP can be a good tool for many investors due to the key features and benefits it offers. Give a look at the key features & benefits of SWPs:
1. Regular Income
The prime key feature of setting up an SWP is a regular income stream. For investors who need regular cash flows, setting up an SWP is a good decision.
With an SWP, you do not need to redeem the units of your mutual fund investments. They will automatically be redeemed & your bank account will be credited with a specified amount. This can save you a lot of time & effort.
Mutual fund companies offer their investor the flexibility to customize the frequency & withdrawal amount whenever they require a modification.
4. Rupee Cost Averaging
SWP facilitates the concept of rupee-cost averaging. SWP help you redeem some of the units of a mutual fund scheme based on the specified amount. When the NAV of the scheme is high, less number of units are sold & vice versa.
This can help smooth out the impact of market volatility and potentially enhance the overall investment returns.
5. Portfolio Management
Instead of selling a large or complete portion of the mutual fund, SWP helps you stay invested in the scheme for a longer period & earn extra returns. This strategy may help you in portfolio management.
Risks Associated With SWPs
An investor does not only consider the advantages of any strategy but also be prepared to digest the associated risks. Here are some potential risks of SWPs:
1. exhaustion of Investment
If the withdrawals exceed the earnings due to the mutual fund’s underperformance, it can deplete the invested amount more quickly than anticipated potentially leaving the investor with insufficient funds for future needs.
2. Market Risk
Everyone knows that mutual funds are subject to market risks. Hence, if the mutual fund scheme experiences a decline, it may result in selling more units impacting your overall investment returns.
Further Reading: Risk-Free Mutual Fund: GILT Funds
3. Changing Financial Needs
Even though SWPs offer flexibility to customize your withdrawal amount, changing financial needs can help you exhaust your investments earlier than you expected. It may impact an investor’s ability to meet future financial goals.
4. Timing Risk
SWPs sell mutual fund units at regular intervals which involve timing risk. If withdrawals are made during a market downturn, it may result in selling the units at lower prices.
SWP vs SIP
The following table will help you understand the difference between SWP and SIP.
|Purpose||Regular Income||Accumulate Wealth|
|Frequency||Regular, as monthly||Regular, as monthly|
|Cashflow||Provides Regular Cashflows||Requires Regular Investments|
|Investment Direction||Redeems Units from existing Mutual Fund||Buys New Units In Existing Mutual Fund|
|Impact on Investment Amount||Reduces Investment Over Time||Increases Investments Over Time|
Different Investor Goals For SWP
SWPs are useful for different types of investor goals. Here are some most common:
- Regular Income: Many investors use SWP for steady regular income.
- Retirement Planning: An SWP can ensure a steady cash flow during retirement years.
- Capital Preservation: Some investors prioritize capital preservation while still generating income.
- Cash Flow Management: An SWP can be beneficial for individuals who need periodic funds for specific expenses.
How To Set Up SWP
Setting up an SWP is a very easy process & a few steps away.
- Choose a mutual fund With an SWP facility.
- Invest an initial fund to sustain periodic withdrawals.
- Determine the withdrawal amount & frequency.
- Fill out the SWP application & submit it.
Once the application is passed, you can get all the benefits of SWP.
Is SWP suitable for all types of mutual funds?
Each investor has a different investment objective, risk profile & time horizon. Clearly, the suitability of SWP is a subjective factor.
Are there any restrictions on the minimum or maximum withdrawal amount?
Yes! Mutual funds companies may set restrictions on the minimum or maximum amount based on the mutual fund scheme, terms & conditions.
Can I modify or stop the SWP anytime?
Yes! Investors are offered the flexibility to modify or stop the SWP based on specific needs.
Can I switch from one mutual fund scheme to another within an SWP?
No, you can not switch from one mutual fund scheme to another within an SWP. However, with some extra effort and charges, you can stop one & start a new SWP in the desired scheme.
How do I determine the ideal withdrawal amount in an SWP?
Determining the ideal withdrawal amount in an SWP requires careful consideration of your financial goals, needs, and investment circumstances.
Can I set up multiple SWPs for different goals?
Yes! you can set multiple SWPs for different goals within the same or different mutual fund schemes.
Can I reinvest the withdrawn amount in another investment option?
Yes! It is a good idea to reinvest the withdrawn amount in another investment option. However, it is important to conduct thorough research before investing your money.
Should I seek professional advice before starting an SWP?
A financial advisor can help you assess your financial situation and goals, and develop an investment plan that is right for you. Hence, you should seek professional advice if you feel overwhelmed.