A Systematic Withdrawal Plan (SWP) is a facility that allows an investor to withdraw money from an existing mutual fund at predetermined intervals. The money withdrawn from a systematic withdrawal plan can be reinvested in another portfolio or it can be used as a source of regular income.
Systematic withdrawal plans are ideal for investors who want to create a regular flow of income from their investments. Often, a Systematic Withdrawal Plan is used to fund expenses during retirement.
Understanding SWP with an example:
A unitholder buys 8000 units of a MF scheme in January 2013. He gives instructions for SWP of Rs 5000 at the end of every month.
Let’s say the NAV in February 2013 was Rs 40.
Therefore number of units required to redeem Rs 5000 = 5000/40 = 125 units
Then, at the end of February, the unitholder will have 8000-125 = 7875 units
Let’s say the NAV in March 2013 was Rs 50.
Therefore number of units required to redeem Rs 5000 = 5000/50 = 100 units
Then, at the end of February, the unitholder will have 7875-100 = 7775 units