Mutual Fund SWP calculation: Systematic Withdrawal Plan (SWP) allows mutual fund investors to withdraw a fixed or variable amount on a pre-determined date.
Mutual Fund SWP calculation: Systematic Withdrawal Plan (SWP) allows mutual fund investors to withdraw a fixed or variable amount on a pre-determined date. The payment can be taken on a fixed date every month, quarter or year.
To enjoy the benefit of Mutual Fund SWP, investors are required to invest a lump sum, which will earn returns during the period of the SWP and provide a fixed amount on a pre-decided interval. However, the amount you can withdraw through SWP would mostly depend on the following factors.
Amount invested: Higher the lump sum, the higher will be the returns on it. If you invest a low lump sum, the periodic amount that you can withdraw via SWP may also be low depending on the returns and duration.
Expected Returns: Returns from Mutual Funds are not assured or guaranteed. If the returns are low, the lump sum may be exhausted earlier. However, if the fund performs better and gives a higher return, the lump sum investment would be able to sustain the SWP for a longer period (see example below)
Choice of Funds: As mutual funds are subject to market risks, choice of funds becomes very important. A fund that has given good returns in past may not continue to do the same in future (see an example). It is therefore recommended to consult a professional SEBI-certified financial advisor to find the most suitable fund for SWP.
Read More: National Pension System Trust launches ‘user-friendly’ app, subscribers complain of glitches
Duration of SWP: The duration of SWP also matters. In the long term, mutual funds generally perform better. So if you remain invested for a longer duration, your lump sum may compound better and sustain the SWP as well. In the short term, the lump sum may be exhausted early as your investment will not be able to enjoy the full benefits of compounding.
How SWP works
Let’s assume you have decided to invest a lump sum to buy 1,00,000 units of a mutual fund scheme when its NAV is Rs 10. It will cost you Rs 10 lakh (1,00,000×10). You have decided to withdraw Rs 10,000 per month through SWP from the fund.
In the first month when the NAV is Rs 10, the fund house will redeem 1000 units and give you Rs 10,000. You will still have 99000 units left in the scheme.
In the second month, if the NAV of the fund increases to Rs 12, the number of units that will be redeemed to pay you Rs 10,000 will be 833 (10,000/12) units. You will now be left with 98,167 units.
You may continue the calculation in the above manner for the following months.
As you have now understood, how SWP works, let’s take a look at what it will take to get Rs 1 lakh per month for 25 years through SWP at different expected returns. There are various online SWP calculation tools that you can also use for this purpose.
If the expected return is 8%: To get Rs 1 lakh per month for 25 years after retirement, the calculator shows you will have to invest Rs 1,55,50,000 if the expected annualised return is 8%. At the end of 25 years, Rs 1.55 crore will still be left in your account.
Read More: PPF vs FD: Choosing the Right Savings Option for Your Financial Goals
If the expected return is 10%: To get Rs 1 lakh per month for 25 years after retirement, the calculator shows you will have to invest Rs 1,25,50,000 if the expected annualised return is 10%. At the end of the 25 years, Rs 1.26 crore will still be left in your account.
If the expected return is 12%: To get Rs 1 lakh per month for 25 years after retirement, the calculator shows you will have to invest Rs 1,05,50,000 if the expected annualised return is 12%. At the end of the 25 years, Rs 1.07 crore will still be left in your account.
If the expected return is 15%: To get Rs 1 lakh per month for 25 years after retirement, the calculator shows you will have to invest Rs 85,40,000 if the expected annualised return is 15%. At the end of 25 years, Rs 86 lakh will still be left in your account.
Should you opt for SWP?
Mutual Fund SWP is an excellent option for periodic withdrawal. However, the fund’s performance is not assured and is subject to market risks. Therefore it becomes important to select the right fund if you decide to opt for SWP. For this, consulting a professional financial advisor is highly recommended.
Disclaimer: The above content is for informational purposes only. Mutual Fund investments are subject to market risks. Please consult your financial advisor before investing.
