17 June 2025

Part 15 Systematic Withdrawal Plan (SWP) Explained with Examples

Part 15 Systematic Withdrawal Plan (SWP) Explained with Examples

SWP Made Simple: Explanation & Step-by-Step Example

Systematic Withdrawal Plan (SWP) - 

Definition:
A Systematic Withdrawal Plan (SWP) is a mutual fund facility allowing investors to withdraw a fixed amount or percentage from their investment at regular intervals (e.g., monthly, quarterly) while the remaining corpus stays invested and earns returns.
 It’s the reverse of a Systematic Investment Plan (SIP), ideal for generating regular income, especially for retirees or those needing steady cash flow.
 
 When to use SWP ?
 SWP is best option for retired people 
 You have to just choose between annual fixed amount or quartely withdrawls.

How It Works:  
Investment: 
You invest a lump sum or accumulate a corpus through SIPs in a mutual fund (equity, debt, or hybrid).  

Withdrawal Setup: 
You specify the withdrawal amount, frequency (e.g., ₹5,000 monthly), and duration. 
The fund house redeems the required units at the prevailing Net Asset Value (NAV) and credits the amount to your bank account.  

Remaining Corpus: 
The unwithdrawn portion continues to grow based on the fund’s performance.
Example: 
You invest ₹10 lakh in a mutual fund with a NAV of ₹20 (50,000 units). 
You set an SWP for ₹6,000 monthly. 
If the NAV is ₹22 in the first month, 272.73 units are redeemed (₹6,000 ÷ ₹22), leaving 49,727.27 units. 
This continues, with the remaining units earning returns

Key Features:  
Flexibility: 
Customize withdrawal amount and frequency. 
You can withdraw only capital gains to preserve principal.  

Market Risk Mitigation: 
Withdrawals are spread over time, reducing the risk of selling all units during a market downturn (rupee cost averaging).  

Suitability: 
Ideal for retirees, those needing supplementary income, or funding goals like education or vacations.  

Benefits:  
Provides predictable cash flow.  
Allows the remaining investment to grow, potentially offsetting withdrawals.  
Reduces tax liability compared to lump-sum withdrawals or dividends.  
Flexible to adjust or stop withdrawals as needed.  

Risks:  
High withdrawal rates or poor fund performance can deplete the corpus faster.  
Market volatility may reduce NAV, affecting the number of units redeemed.  
Exit loads may apply if withdrawals occur before the fund’s lock-in period

Pros:
Regular income post-retirement.
Tax efficiency: Only capital gains are taxed, and if from equity/debt funds, taxation is favorable depending on holding period.
You can choose the frequency and amount.
Allows compounding to work on the remaining invested amount.

Cons:
If markets fall, you may redeem at a loss.
Corpus may deplete early if withdrawal rate is too high or market underperforms.

SWP calculation -  Just a example to understand how SWP works ?

Assumptions - 
Initial Investment: ₹500,000.
Monthly Withdrawal: ₹5,000 (fixed, starting at the end of the first month).
Tenure: 10 years (120 months).

Fund Returns (compounded annually, indicative for mutual funds):

Debt Fund: 8% (post-expense, typical for liquid or short-duration funds).
Hybrid Fund: 10% (balanced funds with equity-debt mix).
Equity Fund: 12% (typical for large-cap or diversified equity funds).

Calculation Method: SWP calculations assume withdrawals reduce units at the prevailing Net Asset Value (NAV), with remaining units growing at the fund’s return rate. 
For simplicity, I’ll use a monthly compounded return approximation.


Results After 10 Years  -

1. Debt Fund (8% Annual Return)
Monthly Return: 0.6434%.
Total Withdrawals: ₹5,000 × 120 = ₹600,000.
Remaining Units: After 120 months, approximately 27,500 units remain (calculated iteratively).
Final NAV: Starting NAV ₹10 grows to ₹10 × (1.006434)^120 ≈ ₹21.50.
Final Corpus: 27,500 × ₹21.50 ≈ ₹591,250.

Outcome: You withdraw ₹600,000 over 10 years, and ₹591,250 remains, growing the initial ₹500,000 despite withdrawals due to steady returns.

2. Hybrid Fund (10% Annual Return)
Monthly Return: 0.7974%.
Total Withdrawals: ₹600,000.
Remaining Units: ~31,000 units.
Final NAV: ₹10 × (1.007974)^120 ≈ ₹25.98.
Final Corpus: 31,000 × ₹25.98 ≈ ₹805,380.
Outcome: You withdraw ₹600,000, with ₹805,380 remaining, as higher returns outpace withdrawals.

3. Equity Fund (12% Annual Return)
Monthly Return: 0.9489%.
Total Withdrawals: ₹600,000.
Remaining Units: ~34,500 units.
Final NAV: ₹10 × (1.009489)^120 ≈ ₹31.38.
Final Corpus: 34,500 × ₹31.38 ≈ ₹1,082,610.
Outcome: You withdraw ₹600,000, with ₹1,082,610 remaining, as equity returns significantly grow the corpus.

Fund Choice:  

Conservative: Use a debt fund (8%) for stability, yielding ~₹560,000 post-tax after 10 years.  

Balanced: Hybrid fund (10%) for ~₹787,880, balancing growth and safety.  

Aggressive: Equity fund (12%) for ~₹1,060,110, maximizing growth but with volatility risks.

Monitor Returns: Review fund performance annually; switch if returns lag significantly.  

Tax Planning: Track LTCG annually to stay below ₹1.25 lakh (equity) or optimize debt fund taxation.  

Inflation Adjustment: Consider a step-up SWP (e.g., 5% annual increase) to maintain purchasing power, but note it reduces corpus faster (e.g., ~₹400,000 left at 12% return).  

Expiry Date Impact: If the leaked news confirms NSE moving to Tuesday, prefer debt/hybrid funds for SWP to avoid equity volatility. Check NSE/BSE websites for SEBI’s circular.  

Use Tools: Use SWP calculators (e.g., on Groww, ET Money, or ICICI Pru) to simulate scenarios with specific funds.

I hope you now have a clear understanding of how SWP works."

This content is for educational purposes only. I am not SEBI-registered, and this is not a buy or sell recommendation. Please consult your financial advisor before making any trading or investment decisions. Trading involves risks, and it is important to conduct thorough research and risk assessment before taking any action."