SWP – Systematic Withdrawal Plan Explained
A Systematic Withdrawal Plan (SWP) allows investors to withdraw a fixed sum of money from their mutual fund investments at regular intervals—monthly, quarterly, or annually. While an SIP (Systematic Investment Plan) is about building wealth by putting money in, an SWP is about utilizing that wealth by taking money out systematically. This tool is particularly popular among retirees looking for a regular pension-like income or individuals seeking a steady secondary income stream from their accumulated corpus.
How can an SWP Calculator Assist You?
Manual calculations for SWP can be tricky because while you withdraw money, the remaining balance continues to earn returns. An SWP Calculator automates this complexity:
- Helps calculate monthly withdrawals: Determine a sustainable withdrawal amount based on your total corpus.
- Helps project total withdrawal: See exactly how much money you will have withdrawn by the end of the tenure.
- Helps estimate remaining balance: Visualize the final value of your investment after all withdrawals are made.
- Helps plan retirement income: Adjust inputs to ensure your savings last throughout your retirement years.
- Helps maintain capital while withdrawing: Find the 'sweet spot' where your withdrawal rate is lower than the return rate, keeping your principal intact.
Example of SWP Working
Let's look at a practical scenario. Suppose you invest ₹5,00,000 in a mutual fund scheme with an expected annual return of 10%. You decide to withdraw ₹10,000 per month for 1 year. Here is how the math works month-on-month:
| Month | Balance (Start) | Withdrawal | Interest Earned | Balance (End) |
|---|---|---|---|---|
| 1 | ₹5,00,000 | - ₹10,000 | + ₹4,167 | ₹4,94,167 |
| 2 | ₹4,94,167 | - ₹10,000 | + ₹4,118 | ₹4,88,285 |
| 3 | ₹4,88,285 | - ₹10,000 | + ₹4,069 | ₹4,82,354 |
| 4 | ₹4,82,354 | - ₹10,000 | + ₹4,020 | ₹4,76,374 |
| 5 | ₹4,76,374 | - ₹10,000 | + ₹3,970 | ₹4,70,344 |
| 6 | ₹4,70,344 | - ₹10,000 | + ₹3,920 | ₹4,64,264 |
| 7 | ₹4,64,264 | - ₹10,000 | + ₹3,869 | ₹4,58,133 |
| 8 | ₹4,58,133 | - ₹10,000 | + ₹3,818 | ₹4,51,951 |
| 9 | ₹4,51,951 | - ₹10,000 | + ₹3,766 | ₹4,45,717 |
| 10 | ₹4,45,717 | - ₹10,000 | + ₹3,714 | ₹4,39,431 |
SWP Formula
The formula to calculate the remaining balance in an SWP account is derived from the future value of an annuity formula:
Remaining Balance Formula
- A= Final Balance
- P= Initial Investment
- W= Withdrawal Amount
- i= Monthly Interest Rate
- n= Total Number of Months
How to Use Finzony’s SWP Calculator?
- Enter investment amount: Input the total lump sum you have invested or plan to invest.
- Choose monthly withdrawal: Decide the fixed amount you want to receive in your bank account every month.
- Set return rate: Estimate the annual percentage return (e.g., 8-10% for conservative hybrid funds).
- Select time period: Choose the duration for which you want to continue these withdrawals.
- Get instant calculations: The tool immediately shows if your plan is sustainable and what your final balance will be.
How an SWP Calculator Benefits You
- Ensures monthly income: Creates a predictable cash flow stream similar to a salary.
- Helps avoid premature depletion: Alerts you if your withdrawal rate is too high, preventing your funds from running out too soon.
- Helps senior citizens & retirees: An excellent tool for pension planning using mutual fund corpuses.
- Better than FD for flexibility: Unlike fixed deposits, you can access your capital or stop withdrawals at any time without penalty.
- Tax-efficient withdrawals: Since withdrawals are treated as capital redemptions, they are often more tax-efficient than interest income from FDs.
- Visualizes future balance: Gives you a clear picture of your financial standing at the end of the tenure.
Frequently Asked Questions
Can I choose the withdrawal amount or is it fixed?
Yes, you have complete freedom to choose the withdrawal amount. However, once the SWP is set up, that specific amount will be credited to your account regularly until you modify or cancel the instruction.
When should someone use SWP?
SWP is ideal when you have a lump sum amount and need regular income. It is best suited for retirees, people taking a sabbatical, or those looking for supplementary income from their investments.
Can individuals other than retirees use SWP?
Absolutely. Anyone seeking a steady cash flow from their investments can use SWP. For example, you can use it to pay for EMI obligations or children's school fees.
What is better — SWP or SIP?
They serve opposite purposes. SIP (Systematic Investment Plan) is for wealth creation where you invest regularly. SWP (Systematic Withdrawal Plan) is for wealth consumption where you withdraw regularly. You choose based on whether you want to build a corpus or use one.
Is SWP risky?
The risk in SWP depends on the underlying mutual fund. If you set up an SWP from an equity fund, market volatility can deplete your capital faster if markets fall. Debt or hybrid funds are generally considered safer for SWP to ensure capital protection.
What happens if the investment value drops?
If the market falls, the fund units are sold at a lower NAV to generate your fixed withdrawal amount. This means more units are sold, which can deplete your capital faster than expected.
Can SWP returns be guaranteed?
No, returns on mutual funds are market-linked and not guaranteed. However, the withdrawal amount you receive is fixed by you, provided there is enough balance in the folio.