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Systematic Withdrawal Plan (SWP)
An SWP allows an investor to withdraw a designated sum of money and units from the fund account at pre-defined regular intervals. It allows investors a certain level of independence from market instability and helps in avoiding market timing. The investor can reinvest the redeemed cash in another portfolio or use it as a source of regular income.
Advantages
Regular Income - SWP helps in creating a regular flow of money from investments on a periodic basis i.e. on a monthly or quarterly basis.
Tax Benefit - Instead of selling all the units at once, spanning the income across multiple intervals can lower the total tax. It is a tax efficient way of receiving regular income.
Avoid market fluctuations - It saves an investor from market fluctuations, as regular withdrawal averages out return value.
How does an SWP work?
An SWP allows you to withdraw a fixed sum of money every month or quarter depending on the option chosen and instructions given by you.
Let's say Ashish has 10,000 units in a mutual fund scheme on 1-Dec-11. He intends to withdraw 6,000 every month through SWP.
| Date | Opening Balance (Units) | NAV | Units Redeemed | Closing Balance | |||||
| 1-Dec-11 | 10000 | 20 | 300 (6000/20) | 9700 | |||||
| 1-Jan-12 | 9700 | 18 | 333.33 (6000/18) | 9366.67 | |||||
| 1-Feb-12 | 9366.67 | 22 | 272.73 (6000/22) | 9093.94 | |||||
In this manner, units from mutual fund holdings will be redeemed in a systematic way to provide the investor with regular income.
Types of SWP
SWP is usually available in two options:
Fixed Withdrawal: In a fixed withdrawal option, the investor specifies the amount he wants to withdraw from his investment on a monthly/quarterly basis.
Appreciation Withdrawal: In an appreciation withdrawal option, the investor withdraws only the appreciated amount on a monthly/quarterly basis.
An SWP can help investors who require liquidity as it permits them to access their money precisely when they need it to meet their needs.
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