Depending on your financial situation, you might feel the need for a regular cash flow in your account. If you have invested in an ongoing mutual fund, you can achieve this with a systematicwithdrawal plan or SWP.

In this article, we will explore how SWP works, and how you can make the most of your SWP scheme.

What is SWP meaning in mutual funds?

When you opt for an SWP, you periodically receive your own money from your ongoing investment by redeeming some mutual fund units. Meanwhile, you keep gaining from the mutual fund units you still hold.

Thus, an SWP is an effective tool to generate regular income from your mutual fund schemes.

Additional Read – Alternate title- Dividend Option vs SWP: Which One Is Better for Regular Cashflows?

How does SWP work?

Here is an example that will help you understand how anSWP in a mutual fund works.

Suppose you invested Rs. 1 lakh in a fund in July 2021. At the time of purchase, the NAV of each fund unit was Rs. 100, so you purchased 1,000 units. Then, you start a SWP where you want to withdraw Rs. 10,000 every month, for the next four months.

 Now, to generate Rs. 10.000, your fund house will redeem a certain number of units, depending on the current NAV. So, your withdrawals will be as follows:

MonthAmount withdrawn (SWP amount)NAVUnits redeemed (SWP amount/NAV)Units remainingInvestment value (Remaining units*NAV)
July10010001,00,000
August10,00010010090090,000
September10,0001059580584,525
October10,0001059571074,550
November10,0001069461665,296

So, by the end of November, you have withdrawn Rs. 40,000 and have Rs. 65, 296 invested in the fund. You also hold 616 mutual fund units.

Note that your unit balance reduces with each SWP instalment. But, if the NAV rises faster than your withdrawal rate, you can continue your SWP and still see appreciation in your remaining units.

Addition Read – SWP- Your Solution for Systematic Withdrawal

Benefits of choosing SWP

  • Rupee Cost Averaging: When you redeem units in instalments, you benefit from Rupee Cost Averaging. If you sell all your units, i.e., make a lump sum withdrawal when markets are down, you can miss out on profits. But, when you opt for an SWP, only a certain number of units are redeemed periodically. So, the market can be low or high on the redemption date. Lesser units will be redeemed for the same amount in a high market as compared to a low one.
  • Investment Discipline: When you have an SWP in place, you can prevent panic selling when markets show downward trends.
  • A regular source of secondary income: Investing in mutual funds and withdrawing via an SWP is an effective way to establish a regular source of secondary income to help you in times of financial need.

Ready to earn a regular cash flow?

Start an SWP today with Tata Capital’s Moneyfy app. Complete the online KYC and be investment ready in just a few days. Then, you can set your financial goal, assess your risk profile, and let the app recommend you the best SWP mutual fund options.  Download the app today.

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