A Systematic Withdrawal Plan (SWP) allows an investor to withdraw a specific amount from their lump sum investments periodically. You can set an Systematic Withdrawal Plan to be either monthly, quarterly or annually.
An Systematic Withdrawal Plan (SWP) calculator takes into consideration the returns from your investment to give you the total value of your investment at the end of your SWP tenure.
Investment consultants and mutual fund advisors are recommending SWP to retired folks as the best way to draw a regular income from their mutual fund investments. However, it is a useful financial facility for investors of all age groups, as it allows investors to withdraw a fixed amount at a predetermined regular interval and at the same time ensure their remaining investment is helping them generate additional returns.
Let’s use an example to better understand the SWP Calculations.
Imagine you have invested Rs. 10,00,000 in a mutual fund scheme and you wish to withdraw Rs. 10,000 every month for the next 3 years through your systematic withdrawal plan.
Let us assume the Net Asset Value (NAV) of the scheme is Rs. 10. With the investment of Rs. 10,00,000, you have accumulated 1,00,000 units in the Mutual Fund.
The withdrawal of Rs. 10,000 from this scheme will mean that 1,000 units will be sold (Rs. 10,000/Rs.10).
The remaining amount in your mutual fund post the first withdrawal will be 99,000 units (1,00,000-1,000).
At the start of the next month, if the NAV of your Mutual Fund scheme increases to Rs. 20, then the withdrawal of Rs. 10,000 would mean, sale of 500 units,(Rs. 10,000/20).
The mutual fund will then be left with 98,500 units, after the second withdrawal.
This is how the Systematic Withdrawal Plan (SWP) works to help investors generate extra returns while ensuring a fixed amount of regular withdrawal.
Under the Systematic Withdrawal Plan (SWP), the withdrawal amount is fixed and an investor can choose the regular withdrawal interval.
An investor can choose to either withdraw a fixed amount on a monthly or a quarterly or annually.
With the Appreciation Withdrawal Option (AWO), an investor may choose to withdraw only the appreciated amount on a monthly, quarterly or on an annual time period.
Withdrawal options can have a detrimental effect on the value of the investment and it is recommended that an investor opts for a realistic withdrawal amounts, keeping in mind their needs and their end goals.
The redemption of a Systematic Withdrawal Plan is subject to taxation.
If an investor’s holding period is less than 36 months, then the amount that the investor withdraws at regular intervals will form a part of their income and will then be taxed in accordance to their income tax slab.
However, if the holding period of the investor is more than 36 months, then the amount that the investor withdraws will be subjected to Long-Term Capital Gains (LTCG) Tax which is 10 percent without indexation and 20 percent with indexation.