What is SWP? Advantages of SWP

What is SWP

If investors need regular and timely cash flow from investments, the choices are bank fixed deposits or postal deposits. However, fluctuations in the interest rates on these schemes can impact investors’ future income needs. Mutual funds have offered a solution for this which is called SWP. What is meant by the Systematic Withdrawal Plan in mutual funds? SWP or Systematic Withdrawal Plan means a MF investment plan, with the help of which investors are able to withdraw fixed amounts at regular intervals of time. They can withdraw the amount monthly/ quarterly/ yearly from investment which they have made in any MF scheme. 

The investors have a liberty to choose a day of the month/quarter/year to take a withdrawal and the amount they want to be credited to their bank account by AMC. To execute this, SWP redeems units of a mutual fund scheme at the interval which has been chosen. Investors can continue to avail the benefits of SWP till there are units in the scheme. Number of units which can be redeemed to generate cash-flow depends upon SWP amount and scheme NAV on the specific withdrawal date.

Advantages of SWP

  • Flexibility: In SWP plan, an investor has a liberty to pick the amount, frequency and date as per the needs. Investors has an option to stop SWP anytime or can add more investments. Investor has the flexibility to even withdraw amount more than the fixed SWP withdrawals.
  • Growth in Capital: If SWP withdrawal rate is lower in comparison to the fund return, investors can avail the benefits of capital appreciation too over the long term. 
  • Steady Income Stream: SWP in mutual funds supports investors by offering a regular stream of income from their investments. Therefore, this plan becomes highly convenient for investors requiring regular cash flow to meet the expenses.

What Category of Investors Rely on SWP?

  • Capital Protection: Risk-averse investors can invest in low-risk profile MF schemes and can opt to get only capital gains as SWP. Suppose initial investment was made in an equity fund and an investor chooses capital appreciation to be received regularly through SWP, then initial investment will be at almost zero risk.
  • For Investors Seeking Pension Income: Investors having zero pension earnings have an option to create their own pension as they can choose to invest retirement corpus in schemes as per their risk profile. Thus, they can get regular income at the frequency decided by them. Therefore, when retirement approaches, an investor can initiate SWP to create his/her own pension.

Why to go for SWP?

Investors know about market fluctuations and their consequences. The temporary fluctuations can have a permanent impact on long-term goals. Changes in the equity prices can affect a fund’s NAV adversely. Especially, when an individual is approaching to his/her goal, the fund returns can diminish if timely withdrawal is not made. 

With the help of SWP, investors can time their withdrawals as per the financial needs. It ensures funds’ availability at the right time.