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How SWP in Mutual Funds is Helpful?



How SWP in Mutual Funds is Helpful?

Mutual fund India offers various way of investing in mutual fund schemes based on your investing needs. One of the investing needs for some investors is to get regular cash flow from their mutual funds. The answer to this investing need is SWP from mutual fund investments. The full form of SWP is systematic withdrawal plan.

SWP is a mutual fund investment solution which can give you fixed cash-flows at regular intervals like monthly, quarterly, or annually. You can specify the fixed amount, interval and date of your choice on which the AMC will ensure that the SWP amount is credited to your bank account.

How does SWP work?

  • You need to have an investment in one or more mutual fund schemes from which the SWP amount will be withdrawn.
  • To generate the desired cash-flows for SWP, the AMC will redeem the units from the invested scheme and send the SWP proceeds to your bank account.
  • The number of units to be redeemed depends on the SWP amount and the prevailing NAV of the SWP withdrawal date. For example, if you want monthly SWP of Rs 20,000 from your mutual fund investment and the mutual fund NAV on the SWP day is Rs 100, then 200 units will be redeemed (Rs 20,000 ÷ Rs 100 = 200 units).
  • As for every SWP the units from the scheme is being redeemed, your unit balance will keep diminishing over time and the SWP will continue as long as you have sufficient unit balance in the folio.

Example of SWP

  • Suppose you have a mutual fund investment of Rs 10 lakhs. The purchase NAV was Rs 40; so, 25,000 units are allotted to you. Let us also assume you want to start a monthly SWP of Rs 15,000.
  • Now suppose In the first month of the SWP, the scheme NAV is Rs 45, therefore, to generate SWP of Rs 15,000, the AMC will redeem, Rs 15,000 ÷ NAV Rs 45 = 333.33 units from your folio. Therefore, after the first SWP, your unit balance will be reduced to 24,666.67 (25,000 units – 333.33 units = 24,666.67 units.
  • Like this, every month the SWP will continue and the units to be redeemed will depend on the mutual fund NAV on the day of SWP.
  • But the question is how to know how long the SWP will continue? The answer lies in using a SWP calculator. The SWP calculator can be searched online. You must input the total investment amount, monthly SWP amount, SWP period and expected rate of return. Based on the inputs the SWP calculator will show you the results. For example – the total mutual fund investment amount is Rs 50 Lakhs, monthly SWP amount Rs 40,000, period 10 years and expected return 10%. The SWP calculator will show the following result –

Total withdrawal amount – Rs 48,00,000

Final balance amount at the end of the SWP period – Rs 52,73,126

Total Profit – Rs 50,73,126

Things to remember before you start SWP –

  • The SWP withdrawal rate should be moderate if you want to continue your SWP for a long period of time. Use a SWP calculator to understand this better.
  • If the annual withdrawal rate is lesser than that of the average return on the investment, the regular cash-flows will continue, and you will also have some capital gain at the end of the SWP period.
  • You should invest in mutual funds according to your risk profile and the investment needs.

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