Systematic Withdrawal Plan Work

There are two popular methods of investment in mutual funds. You can either invest a lump sum amount in your mutual fund scheme or opt for a Systematic Investment Plan (SIP).

In a similar way, you can withdraw your funds as a lump sum amount or through a Systematic Withdrawal Plan (SWP). If you have built a huge corpus during the initial period of your mutual fund, you can opt for a SWP to get fixed returns.

An SWP is a redemption strategy for mutual funds that allows you to withdraw in a planned and regular manner. Under this strategy, you can choose how much money is withdrawn in every instalment. 

In addition to this, you can also select the frequency of these withdrawals, which can be quarterly, bi-monthly, monthly, or even weekly. Once you have completed the setup of your SWP scheme, it will redeem the units amounting to the determined SWP amount and credit it to your bank account. 

In this way, SWP investments are entirely opposite to SIP plans. The best part is that the SWP does not require you to sell your investment all at once. Instead, it withdraws periodically, and it protects you from losing out on returns if the fund is performing poorly at the time.

When you opt for a systematic withdrawal plan, it affects your holdings in your mutual fund account. Here, units are redeemed regularly from your mutual fund account and the corpus of your fund depletes over time.

You can understand this with an example. Assume that you have invested in 4,000 units of a fund that amount to ₹10 Lakhs. If you opt for a systematic withdrawal plan, you can choose to receive a regular income of ₹10,000 through it.

In the first month, the NAV of your fund may be ₹25. This means that 400 units of your funds will be redeemed to provide you with a withdrawal amount of ₹10,000. This would bring down the total units in your mutual funds to 3,600 and reduce its total value. 

This process goes on until you decide to stop, and you will keep getting the amount you want, based on your units.

Here are some disadvantages you must be aware of when investing in a Systematic Withdrawal Plan:

• Risk Due to Inflation: Since the withdrawal amount remains constant throughout, it may reduce your purchasing power during inflationary periods

• Volatility Risk: As the mutual fund unit value decreases due to market fluctuations, this may affect your withdrawal amount 

• Charges on Withdrawal: Some mutual funds have exit load charges on withdrawal that can reduce your total returns

• Liquidity Risk: Once invested, you may not have funds readily available to meet any unexpected financial emergency

A systematic withdrawal plan may be best for you if you want to redeem your funds at regular intervals. This can help you earn higher returns in the future if the fund is performing poorly at a given time.

Moreover, this withdrawal strategy is ideal for retired personnel as this regular income can complement their pension to cover their expenses. 

In conclusion, SWP plans are potent tools for savings which may be more favourable to you if you need the periodical inflow. Keep in mind that it does require you to invest a larger sum at the start, which is why many retirees opt for it. 

Since withdrawal requires the selling of securities in your possession, the transaction will be taxed as income. Hence, it is crucial to consider the tax structure and your tax liabilities before you decide to opt for a systematic withdrawal plan.  

On Bajaj Markets, you can also make use of the SIP Calculator and Lumpsum Calculator to estimate the returns you could earn on your mutual fund investment.