SWP In Mutual Funds (2022): Overview, Importance & Calculation Of SWP

A systematic withdrawal plan (SWP), or a Systematic Withdrawal Plan, is a reliable investment scheme that allows an investor to withdraw a fixed amount of money from mutual funds for regular investments. In this article, we will look at what is SWP in Mutual funds and how does it work?

SWP meaning in Mutual Funds:

SWP in mutual funds is a procedure in which investors withdraw a certain proportion of their money at regular intervals. The withdrawals are made from mutual funds. Investors can choose the amount and frequency that can be withdrawn or they can choose to only withdraw the gains from the mutual funds, keeping the investment capital intact. 

In many mutual funds, it is possible to make withdrawals without incurring a tax, since the distribution is taken directly out of your broker account and the funds are withheld at the source. The withholding amount will depend on your broker and your personal tax situation.

How to calculate SWP in Mutual Funds with example

Systematic Withdrawal Plan or SWP is a facility provided by mutual fund houses whereby an investor can instruct the fund house to make periodic withdrawals from his/her investment and credit the same to his/her bank account.

This facility is particularly useful for retired investors who want to use their investments in mutual funds to create a regular income stream.

To calculate SWP, you need to know the NAV (Net Asset Value) of the scheme as of the date of withdrawal.

The formula for calculating SWP is:

Number of units = (Withdrawal amount / NAV) * 100

For example, if the current NAV of a scheme is Rs.20 and you want to withdraw Rs.2,000 from your investment, the number of units that will be redeemed will be:

Number of units = (2,000 / 20) * 100 = 10,000 units

Similarly, if the current NAV of a scheme is Rs.10 and you want to withdraw Rs.1,000 from your investment, the number of units that will be redeemed will be:

Number of units = (1,000 / 10) * 100 = 10,000 units

Points to be considered while calculating SWP in Mutual Funds

1. The investment horizon: This is the time period for which the investor plans to stay invested in the scheme. Determining the investment horizon is crucial for your investment portfolio because it decides the portfolio’s exposure to risk and significant monetary growth. 

2. The NAV of the scheme: This is the price per unit of the scheme, and is used to calculate the number of units that will be redeemed each time a withdrawal is made.

3. Exit load: This is a charge that is levied by some schemes when an investor exits or redeems his/her units before a certain period of time. Exit loads are usually expressed as a percentage of the NAV.

4. Scheme type: This is the category of scheme in which the investor wants to invest, e.g. equity, debt, balanced, etc.

5. Lock-in period: The lock-in period is another important factor to consider, as it determines the minimum period for which the investor has to stay invested in the scheme.

These are just some of the factors that need to be considered before  investing in a mutual fund scheme. 

Importance of SWP in Mutual Funds

Mutual funds are an important part of any investor’s portfolio, as they offer a way to diversify one’s holdings while also providing professional management. For these reasons, many investors choose to invest in mutual funds rather than individual stocks or other securities.

While there are many different types of mutual funds available, one of the most reliable schemes with near zero risk is the SWP, or systematic withdrawal plan. This type of fund allows investors to withdraw a fixed amount of money from their investment on a regular basis, making it an ideal way to generate income in retirement.

There are several advantages to investing in a SWP mutual fund, including the following:

1) It can provide a steady stream of income: A SWP can be a great way to generate income in retirement, as it can provide a regular stream of payments. This can be especially helpful for those who are relying on Social Security or other fixed sources of income.

2) It can help to diversify your portfolio: By investing in a mutual fund that includes a variety of different asset classes, you can help to diversify your portfolio and reduce your overall risk.

3) It can offer tax advantages: In some cases, the distributions from a SWP may be taxed at a lower rate than other types of investment income.

4) It can be flexible: Some SWP plans allow investors to make withdrawals on a monthly or quarterly basis, giving you the flexibility to take out money when you need it.

5) It can be a good way to save for retirement: By investing in a SWP, you can help to build up your retirement savings while still enjoying the benefits of tax-deferred growth.

Jupiter Money’s SWP in Mutual funds is the best way to get regular income from your investments. This facility allows you to withdraw a fixed sum of money at regular intervals, giving you a steady income stream that can help meet your financial needs.

CAGR vs SWP in Mutual Funds:

When comparing CAGR and SWP in Mutual Funds, it is important to consider the following:

-CAGR is a measure of return that takes into account both the principal investment and any reinvested earnings. SWP does not take into account reinvested earnings.

-CAGR assumes that investments are held for the entire period, while SWP allows for periodic withdrawals which may reduce the total value of the investment.

-CAGR is useful for determining the long-term growth potential of an investment, while SWP is more useful for planning regular income from an investment.

Overall, CAGR is a more comprehensive measure of return, while SWP is more helpful for planning purposes. However, both metrics have their own strengths and should be considered when making investment decisions.

Conclusion

In conclusion,  we can say that a systematic withdrawal plan is a good option for those looking to invest in mutual funds. It gives the investor the flexibility to choose how much they want to withdraw from their investment, and it also allows them to continue to grow their investment over time. However, it is important to remember that with any investment, there are risks involved. Therefore, it is important to speak with a financial advisor before making any decisions.

FAQs

1. Is SWP better than FD?

FDs tend to be more stable and offer guaranteed returns, while SWPs offer the potential for higher returns but are subject to market fluctuations. Ultimately, it is up to the individual investor to decide which option is best for them.

2. Can SWP be done online?

Yes, SWP can be done online through a broker or financial institution. This allows you to manage your investment and make changes as needed. With Jupiter, you can set up an SWP online and track your progress through our easy-to-use platform.

3. Can I stop my SWP anytime?

Yes, you can stop your SWP anytime without penalty. However, it is important to note that stopping an SWP may trigger capital gains taxes if the value of your investment has increased since you started the plan.