Overview of Systematic Withdrawal Plan (SWP)

An SWP, or Systematic Withdrawal Plan, is an investment plan from which individuals- more often retirees-withdraw money systematically from an investment- a mutual fund or any other long-term saving scheme. An investor can convert his or her investment into regular cash flows, which is still accompanied by growth in the portfolio. An SWP is an investment idea that generates a regular income stream and therefore is quite an effective strategy for retirement savings or other long-term investments. An SWP is normally compared to a SIP, where a person puts money regularly to enhance his corpus over time. However, an SWP is the reverse where it helps one create liquidity and regular payments without the compulsion of liquefying the entire corpus in one go. In this article, we will look at the overview of SWP, its key features, calculations, taxation, benefits, and pitfalls. Overview of Systematic Withdrawal Plan (SWP) A Systematic Withdrawal Plan (SWP) is a plan whereby a fixed sum or a fixed percentage of value is withdrawn from the mutual fund at periodic intervals which are usually monthly, quarterly or yearly. This option enables systematic cash flow disciplines with provision for growth in investments so made. An SWP unlike lump-sum withdrawal or annuities lets an investor continue to carry on a part of his corpus in the market, that will probably grow further. It primarily aims to generate some periodic income with saving as much of its corpus as possible for a future use. For instance, an enormous amount of investment in a mutual fund may be allowed to withdraw a given percentage value of the fund on monthly basis. Therefore, these withdrawals would provide the investor with an income that would come every month without totally liquidating the investment. As time will pass, the withdrawal would reduce the value of the portfolio, but through the performance of the fund, it may shoot very high. Critical Features of SWP Periodicity of Withdrawals: The most characteristic feature of an SWP is that the amount withdrawn is periodic in nature. According to the investor\'s choice, the periodicity can be a month, quarterly, or annual. Flexibility: One can withdraw a certain amount of money, the withdrawal time, or even closing the plan without serious penalties though some might be subject to fees as required by the rules of the fund. Automatic Withdrawals: Almost all mutual funds and other investment services offer a facility of automatic withdrawal for the investor. Once set up, it withdraws money at automatically determined intervals without any need for interference from the investor. Scope for Capital Appreciation: Even as the withdrawals are being taken, the balance corpus enjoys the scope to grow. Thus, SWP is one of the best ways of creating income without totally reducing the principal. It gives an investor the choice of selecting an amount for withdrawal: generally, it can either be a fixed amount or a percentage based on the corpus that they s