The Basics of the Systematic Withdrawal Plan

What is a Systematic Withdrawal Plan?

What is a Systematic Withdrawal Plan?

A systematic withdrawal plan, or SWP, facilitates an investor in withdrawing a fixed amount from their mutual fund every month. annual, half-yearly or quarterly withdrawals are also possible through SWPs.

Many schemes, particularly, debt-oriented ones have monthly or quarterly dividend options. However, dividends – which are acquired from profits of the scheme – are not guaranteed, every month.

The profits, or the distributable surplus, from where the dividends are sourced, depending on the market movements and fund performance. Once you understand what is a Systematic Withdrawal Plan in mutual funds, you can start reaping its many benefits.

• Benefits of SWP

1. Disciplined Investing: An SWP withdraws some mutual fund units every month, to meet monthly expenses, regardless of market levels. It, therefore, prevents the withdrawal of large amounts due to the fluctuations within the market. It also withdraws money even when markets are reaching a crest and, thus, prevents further investments, or enables staying invested in boom periods.


2. Rupee-Cost Averaging: SWPs ensure benefits for the investors when they withdraw their investments due to rupee cost averaging. Rupee cost averaging gives an investor the average NAV of a mutual fund over several months/years rather than making him dependent on a NAV at a single point of time.


3. Fixed Income: A SWP helps investors get fixed periodic amounts which prove beneficial to their personal and financial pursuits, such as, child support, retirement plans, and other possible business.


4. Tax Efficiency: Each withdrawal made through the systematic withdrawal plan mutual fund is viewed as a combination of capital and income. Tax is only payable on the income component and not the capital component. It is also more tax-efficient because it splits the income over several years. 

• Planning

Investors can use resources such as systematic withdrawal plan calculator or standard retirement calculators, in order to plan systematic withdrawals. These calculators help determine the target amount necessary for their withdrawal needs through a pre-determined utilization phase. Variables involved include age, annual salary, retirement savings income allocation, current allocation, retirement income needs, expected annual return from investment, social security estimate and other retirement fund estimates.

• Setting an SWP 

Most types of investments offer a systematic withdrawal plan. Investors can make systematic withdrawals from mutual funds, annuities, brokerage accounts, 401k plans, IRAs and more

An SWP form or a distribution form is required. Along with the form, investors can determine various distribution schedules including monthly, quarterly, semi-annually or annually. Accounts typically have a minimum balance requirement for beginning systematic withdrawals.

For convenience, investors may also specify liquidation percentages by funds for accounts with multiple holdings, which can be facilitated through a brokerage
.