6 min read • Published 10 Feb 25
Understanding SWP in Mutual Funds
Table of Contents
Individual investors shy away from most investments because a lack of withdrawal facility might cause a future shortage of liquidity. Investors can avoid any unnecessary future shortage of funds or liquidity whilst not compromising on their investment goals through SWP in mutual funds.
The SWP full form is a systematic withdrawal plan. Under a systematic withdrawal plan, an investor has to invest in a mutual fund scheme to withdraw a predetermined amount at predetermined intervals.
How SWP In Mutual Funds Work?
It is better to understand SWP in mutual funds and how it works through an illustration.
Suppose, a person has invested ₹60,000 for one year. The monthly withdrawal is ₹1,000 and the rate of return is 10%. The table below shows the activity of the funds for 5 months.
| Month | Balance at the beginning (₹) | Withdrawal (₹) | Return earned (@ 10%) |
| 1 | 60,000 | 1,000 | 491 |
| 2 | 59,491 | 1,000 | 487 |
| 3 | 58,978 | 1,000 | 483 |
| 4 | 58,461 | 1,000 | 478 |
| 5 | 57,939 | 1,000 | 474 |
After deducting ₹1,000 in the first month, the balance is ₹59,000. However, the return earned during the first month makes the balance carried forward to the second month as ₹59,491.
Therefore, in the case of SWP in mutual funds, even after making monthly withdrawals, the return earned is added back to the amount invested. This system continues till there is money in the corpus.
Types of SWP In Mutual Fund
There are various types of SWP in mutual funds. The most commonly known systematic withdrawal plans are as follows.
Fixed Amount SWP
Irrespective of how the investment performs, the investor withdraws a certain amount of money at scheduled periods. This generates consistent revenue but may erode the capital if returns are inadequate.
Appreciation SWP
The investor withdraws just the returns while retaining the capital. This technique is more viable, although it may produce fluctuating revenue depending on market volatility.
Variable Amount SWP
The withdrawal sum is changed according to the investment’s success or the investor’s evolving requirements. This offers versatility but needs active management.
Features Of SWP In Mutual Fund
The salient characteristics of the systematic withdrawal plan are as follows:
Consistent Income
Investors can build up their investment corpus through periodic contributions and later initiate SWP to get consistent inflows. This serves as a financially prudent strategy to ensure regular cash flow.
Withdrawal Terms
The terms of withdrawal like the amount to be withdrawn and the time interval are determined by the investor’s agreement with the mutual fund house.
Preservation of Capital
The residual investment keeps on generating returns, enabling it to support withdrawals and protect capital.
Benefits of SWP in a Mutual Fund
The following are the advantages of a systematic withdrawal plan.
Decreased Market Timing Risk
A systematic withdrawal strategy removes the necessity of attempting to anticipate the market. Rather than aiming to sell at the appropriate market high, an SWP in mutual funds enables investors to follow a controlled withdrawal strategy, thus lowering the risk related to fluctuations in the markets.
Building a Stable Secondary Income Source
In the current economic climate, having a supplementary source of income is critical for keeping up with the expenses. Investing in mutual funds and using SWP can help investors generate reliable secondary income.
Capital Gains Tax
When people invest through a SWP, they determine when and how much to withdraw. They can stretch their withdrawals across several fiscal years to remain in lower tax bands, effectively lowering the tax burden.
SWP VS SIP
Although the acronyms are so similar that one can mistake them for a typing error, the concepts of SWP and SIP are far from similar. Below is the list of every major distinction between the two.
| Parameter | SIP | SWP |
| Meaning | A systematic investment plan is a means of investing a predetermined amount in a mutual fund plan on a recurring basis. | SWP is a way of withdrawing a predetermined sum from a mutual fund scheme at a predetermined interval. |
| Initial Investment | In the case of SIP, the investor invests a predefined amount at predefined intervals. | If the investor wishes to invest in a mutual fund through SWP, they will have to create an investment corpus. |
| Sustainability | Since SIP works on compounding, it generates greater returns over a longer period. | SWP is suitable for people who have a fixed revenue flow over some time and do not mind waiting for a specific period to get returns. |
However, SWP provides an opportunity for investors who require a consistent revenue flow.
Conclusion
A systematic withdrawal plan is a financial technique that provides several advantages. It helps deliver a consistent income flow in the form of withdrawals while preserving the initial investment value.
The SWP method of investing in mutual funds enables the entry of the most risk-averse investors into the marketplace. Liquidity and high gestation period along with market volatility, have always been a big barrier to the markets. SWP makes a modest attempt to bridge these gaps. Nevertheless, investors must adjust the SWP investing plan to their objectives.
Q: Which SWP fund is best?
Which SWP is best depends upon a variety of factors including market conditions and investor temperament. It depends on the market performance of the mutual fund. Various parameters like fund performance, fund manager expertise and expense ratio help investors gauge the financial viability of a mutual fund scheme. An investor must calculate their individual risk tolerance and financial goals before setting appropriate terms for SWP.
Q: What are the disadvantages of SWP?
SWP is a great method of investing for those who wish to have a regular income flow. However, there are some disadvantages to this strategy as well. Systematic Withdrawal Plan may lead to depletion of investment corpus if not planned well. Moreover, SWP is a strategy of mutual fund investment which is susceptible to market volatility. Investors should keep these drawbacks in mind to plan their SWP investments in an analysed and prudent manner.
Q: What is the 4% rule for SWP?
The 4% rule is a withdrawal method in which 4% of the corpus amount deposited is withdrawn and then adjusted for inflation each year. This criterion is frequently regarded as a secure withdrawal rate.
Q: Who should invest in SWP?
Investors who want to receive consistent income from their mutual fund assets, like retirees and those with other financial responsibilities, might contemplate investing in the top mutual fund which offers withdrawal through SWP. Furthermore, investors with high tax rates and those requiring capital protection may find SWP to be an appropriate solution.
Q: Is SWP better than FD?
Fixed deposits (FDs) may give security and set returns, whilst SWPs may offer flexibility by enabling withdrawals to be adjusted as needed. As a result, it is critical for an investor to assess their individual requirements to figure out which alternative is best for their investing plan.
