What is a Systematic Withdrawal Plan (SWP)?
A Systematic Withdrawal Plan (SWP) is an investment strategy that allows investors to withdraw a fixed amount of money at regular intervals from their mutual fund investments. It provides a steady cash flow while keeping the remaining investment growing.
It offers flexibility, allowing investors to choose both the frequency and the amount of the withdrawals, while the remaining investment continues to grow. SWP is the reverse of a Systematic Investment Plan (SIP), where one systematically invests a fixed amount over time.
Systematic Withdrawal Plan (SWP) is particularly beneficial for those who want to generate a steady cash flow, such as retirees or individuals looking for periodic income, without completely liquidating their investments.
- Flexible Withdrawals: SWP allows the investor to decide on the withdrawal frequency (monthly, quarterly, semi-annually) and the withdrawal amount.
- Capital Appreciation: The remaining invested capital continues to grow with market fluctuations, providing a dual benefit of income and potential capital appreciation.
- Partial Withdrawal: Investors can withdraw a specific amount or units, unlike full redemption where the entire investment is liquidated.
- Reduces Market Timing Risk: Since SWP provides periodic withdrawals, it reduces the need to time the market for selling investments at the right moment.
How SWP Works Explained With SWP Calculator?
- Investment – The investor initially puts a lump sum amount into a mutual fund.
- Withdrawal Setup – The investor decides on:
- Withdrawal Amount (e.g., ₹10,000 per month)
- Withdrawal Frequency (e.g., monthly, quarterly, annually)
- Units Sold – Every withdrawal requires selling a portion of the mutual fund units.
- Remaining Growth – The remaining units continue to grow as per market performance.
Let’s assume the following inputs:
- Initial Investment: ₹10,00,000
- Monthly Withdrawal: ₹15,000
- Expected Return: 10% annually
- Duration: 10 years (120 months)
Using these inputs, the moneycontain SWP calculator would give you the following results:
- Total Withdrawal: ₹18,00,000 (₹15,000 × 120 months)
- Interest Earned: ₹393,761
- Final Value of Investment: -₹406,239
- Remaining Investment:-₹800,000
Here, after 10 years of withdrawing ₹15,000 per month, your initial investment of ₹10,00,000 would have a negative balance -₹406,239, and you would have earned ₹393,761 in interest.
Moneycontain SWP calculator is a powerful tool that helps investors estimate the potential outcome of their SWP investments. It calculates how long your investments will last, the interest you may earn, and how much you can withdraw regularly without depleting your capital too quickly.
By inputting specific parameters into the calculator, you can quickly assess the feasibility of your SWP strategy, making it a useful tool for financial planning.
However, before you calculate make sure you know few things such as :
- Initial Investment: The total amount of money you plan to invest in the mutual fund at the start of the SWP.
- Monthly Withdrawal: The fixed amount you wish to withdraw every month.
- Expected Rate of Return: The annual rate of return you anticipate your mutual fund will generate. Most calculators assume an average return rate, but actual returns can vary.
- Investment Duration (in Months): The number of years or months you plan to keep the SWP running.
After inputting the values mentioned above, the moneycontain SWP calculator will instantly show you the Final Value of Investment, Total Interest Earned, and the Remaining Principal at the end of the investment period.
It will also show how much in total you have withdrawn and how much of the original investment is still intact.
- Final Investment Value: The remaining investment after all the withdrawals, accounting for market growth (or loss).
- Total Interest Earned: The total interest earned over the investment period.
- Total Withdrawal Amount: The cumulative amount withdrawn through SWP during the investment period.
- Remaining Investment: The remaining balance at the end of the withdrawal period.
Now, go ahead and use the SWP Calculator given below:
If the final value in a Systematic Withdrawal Plan (SWP) becomes negative, it means that the withdrawals have exceeded the total returns and principal investment. In simpler terms:
- Depleting Investment: The amount you are withdrawing each month is larger than what the investment is earning in returns, leading to depletion of the principal amount.
- Insufficient Growth: The fund’s returns are not enough to support the withdrawals. This typically happens when:
- The rate of return on the investment is too low.
- Market volatility negatively impacts the growth of your investment.
- Over-Withdrawal: If you are withdrawing an amount that is too high compared to the investment’s earnings, you will gradually eat into the capital, and once that capital is exhausted, the final balance becomes negative.
A negative final value signals that the SWP is unsustainable under the current withdrawal rate, and without adjustments (either by reducing the withdrawal amount or choosing funds with higher growth potential), you risk completely eroding your investment portfolio.
Examples of SWP:
Example 1: Retired Person Using SWP
- Investment Amount: ₹10,00,000 in an equity mutual fund.
- Expected Annual Return: 10%.
- Monthly Withdrawal: ₹10,000.
- Effect:
- ₹10,000 is withdrawn every month.
- The remaining corpus continues growing.
- The plan lasts longer compared to withdrawing everything at once.
Example 2: Tax-Efficient SWP for a Salaried Individual
- Investment: ₹5,00,000 in a debt mutual fund.
- SWP Amount: ₹15,000 per month.
- Tax Benefit:
- SWP is considered capital gains rather than income.
- Lower tax compared to fixed deposit (FD) interest (which is fully taxable).
Benefits of SWP:
- Regular Income – Provides a steady cash flow for retirees or anyone needing consistent payouts.
- Tax Efficiency – Long-term capital gains (LTCG) tax is lower than FD interest tax.
- Market-Linked Growth – Unlike fixed deposits, the remaining corpus has the potential to grow.
- Flexibility – Investors can modify the withdrawal amount or stop SWP anytime.
- Rupee Cost Averaging – Since units are sold regularly, it reduces the risk of selling all units at a market low.
Comparison: SWP vs Other Investment Options
Feature |
SWP (Mutual Funds) |
Fixed Deposits (FD) |
Annuity Plans |
Dividend Stocks |
Rental Income |
|---|---|---|---|---|---|
Returns |
Market-linked (7-12% expected) |
Fixed (5-7%) |
Fixed (5-6%) |
Variable |
Variable |
Liquidity |
High, can modify/stop anytime |
Locked-in (Premature withdrawal penalty) |
Low (Fixed term) |
Moderate (Sell shares if needed) |
Moderate (Sell property if needed) |
Taxation |
LTCG/STCG on withdrawals |
Fully taxable as income |
Fully taxable as income |
Dividend tax applicable |
Rental income taxable |
Risk Level |
Moderate (Market risk) |
Low |
Low |
High (Stock market fluctuations) |
Moderate (Market-dependent) |
Best for |
Retirees & Passive income seekers |
Risk-averse investors |
Long-term pension |
Growth-focused investors |
Property owners |
When to Choose SWP?
- For Retirees – Provides a monthly income while keeping investments growing.
- For Passive Income Seekers – Allows controlled withdrawals with potential appreciation.
- For Tax Efficiency – More tax-friendly than FDs.
When NOT to Choose SWP?
- If the market is volatile and you need guaranteed returns (FD or annuity may be better).
- If you need high liquidity and may withdraw a large amount at once (Lumpsum withdrawal is preferable).
When To Start Doing SWP?
It’s important to note that market conditions can have a significant impact on the outcome of your SWP. In a bull market (rising market), the growth of your investment may outpace your withdrawals, allowing your capital to continue growing despite regular withdrawals.
On the other hand, in a bear market (declining market), your withdrawals may begin to deplete your investment faster, especially if the returns are lower than expected.
In a volatile market, it is crucial to review and adjust your SWP plan regularly. If necessary, consider reducing the withdrawal amount or adjusting the withdrawal frequency to protect your capital from significant depletion.
SWP vs SIP Which Is Better?
Both SWP and SIP are systematic investment strategies, but they operate in opposite directions:
- Systematic Investment Plan (SIP): SIP allows you to invest a fixed amount at regular intervals in a mutual fund. This strategy is aimed at wealth accumulation over time. SIP is particularly effective in volatile markets, as it helps in rupee cost averaging.
- Systematic Withdrawal Plan (SWP): SWP, on the other hand, allows you to withdraw a fixed amount regularly from your mutual fund investment, which provides a steady cash flow. It is more suitable for those looking for income generation, especially retirees.
An SWP calculator can help you determine how much you can withdraw from your investment without depleting it too quickly, whereas a SIP calculator is designed to help investors understand the growth of their investments over time.
- SIP is better for younger investors or those in the growth phase, aiming to build a corpus.
- SWP is better for retirees or those seeking a steady stream of income during their withdrawal phase.
However, both SIP and SWP can complement each other. You can invest in SIPs during your working years and switch to an SWP during retirement to generate income from the corpus you built.
Important Things to Consider Before Investing In SWP Scheme:
- Start with Conservative Withdrawals: The withdrawal amount should be realistic, aligned with the expected rate of return, and sustainable over time. Ideally, the withdrawal rate should not exceed 4-6% annually.
- Keep a Diversified Portfolio: Don’t rely solely on SWP from equity funds. It is advisable to have a mix of debt and equity investments to balance risk and return.
- Review Periodically: Regularly review your SWP plan and adjust your withdrawals if required. Changes in the market, inflation, or your financial needs may necessitate revisiting your withdrawal strategy.
- Consider Inflation: Inflation can erode the value of your SWP withdrawals over time. As a result, you may need to periodically increase your withdrawal amount to maintain your standard of living.
- Choose Growth Option Over Dividend: In an SWP, it’s often better to choose the growth option of a mutual fund rather than the dividend option. Growth plans reinvest the returns, compounding your capital, whereas dividends pay out regularly but don’t necessarily offer capital appreciation.
When choosing a mutual fund for SWP, it’s essential to assess your investment horizon, risk tolerance, and whether the fund can generate sufficient returns to cover your withdrawals without depleting the principal.
Conclusion:
SWP is an excellent option for generating steady income while keeping investments intact. It provides better tax efficiency and flexibility compared to traditional options like fixed deposits and annuities. However, since it is market-linked, it requires risk tolerance and long-term planning.
By carefully planning the withdrawal rate, keeping a diversified portfolio, and using tools like SWP calculators to simulate potential outcomes, investors can enjoy the benefits of SWP while maintaining a stable financial future.
Are you looking to invest in fixed deposits than do check, How Much You Can Get Monthly From Fixed Deposits. Also, see highest interest rate offering bank for fixed deposits(FD) in India.
Checkout the impact of inflation on your returns as well as your life using moneycontain inflation rate calculator and calculate your future expenses easily.
If, you have liked the content please do share it with your friends or on social media, as sharing do bring the good karma. If you have any questions or feedback you can leave them in comment box below.
Note: Please do not take this as any recommendation, to trade or invest. This is just for reference, to make you understand more about the SWP and its importance, under no circumstances intended to be used or considered as financial or investment advice, a recommendation or an offer to sell, or a solicitation of any offer to buy any securities or other form of financial asset.
Please do your own research and make investment. Moneycontain will not be responsible for any of your losses at all. The point made is for educational purpose only. All investments are subject to risks, which should be considered prior to making any investments.
