In this article, we cover the essentials of a mutual fund systematic withdrawal plan (SWP) by answering some frequently asked questions.
1: What is a Systematic Withdrawal Plan?
The SWP is the opposite of a SIP. In a SIP, you invest a fixed amount each month (the most frequently used interval) and build up a lump sum. In an SWP, you invest a lump sum and withdraw a fixed amount each month (typically) to be used as a source of income.
The withdrawal is done in such a way that the product of units redeemed times the current NAV is equal to the fixed amount desired.
2: Why were SWPs created?
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
Anything that the AMCs do is for their benefit primarily. With an SWP, the AMC (and their salesmen) earn a fee/commission on the lump sum invested and this income reduces gradually with each SWP instalment. Unlike a SIP where the fee/commission builds up gradually over time, the SWP provides instant profit and is more beneficial to the AMC considering the time value of money.
3: When should I use an SWP?
Just like a SIP, an SWP is entirely unnecessary (the same goes for the STP too!). If you want to invest in a mutual fund each month, do so manually on any day of the month convenient to you.
If you want to withdraw from a mutual fund, do so whenever you like! There are no extra benefits of a SIP or an STP. Not getting tied down to a SIP allows you to invest as much as possible each month and vary the investment amount at will depending on your needs.
Similarly, not using an SWP allows you to redeem what you want and when you want.
4: Which type of funds can be used for SWP?
The SWP amount for any month = Current NAV x no of units.
If the NAV on the date of redemption is low, then more units will be redeemed and the investment will deplete faster. If the downward trend continues the entire corpus will get exhausted much sooner than anticipated.
Therefore the simple thumb rule is, never set up an SWP from a fund in which the NAV is volatile (eg. equity funds, so-called balanced advantage funds, aggressive hybrid funds etc are to be avoided). These types of funds offer higher incentives to the sales guy!
We recommend using only funds like liquid funds, overnight funds, money market funds for regular withdrawals.
Those with a higher risk appetite (meaning more cash to burn) may consider ultra short term funds, arbitrage funds. Conservative hybrid funds or other long-term debt funds may be used by those with an even higher risk appetite.
5: What precautions are necessary before setting up an SWP?
The SWP is incorrectly recommended as a way to get a regular income after retirement from volatile mutual funds as mentioned above. Senior citizens with limited capital market experience in their youth and/or limited funds to work with should not be enticed with the advertised claims of “income with growth”.
Trying to maximise retirement income with less than an ideal corpus is an extremely difficult problem in finance and an SWP from a volatile mutual fund can result in irredeemable disaster.
Beware of SWP backtests with balanced advantage or any other mutual fund. The past performance does not reflect future performance disclaimer applies!
6: Can I use an SWP as part of a retirement bucket strategy?
Yes, but as mentioned above it will have to be from something like a liquid fund for either the main income (in case of no other pension source) or for handling discretionary expenses. See for example: I am 30 and wish to retire by 50 how should I plan my investments?
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)