Systematic Withdrawal Plan – How to set up SWP in Mutual Funds
Systematic Withdrawal plan or SWP in mutual fund can be used to withdraw money into your bank account directly. Say you have accumulated corpus of 1 crore in your mutual fund portfolio, Instead of withdrawing fully you can use this option to withdraw monthly a fixed amount.
How to use SWP in Mutual Fund at the end of SIP ?
If you had started investing in SIP and accumulated a huge corpus then it is easy to withdraw by using Systematic Withdrawal Plan.
Say you accumulated 3 crores at the end of 20 years by SIP. Now you can withdraw 6% or 7% alone every month and then the rest of the amount can grow in this equity fund itself.
Even if you have Lumpsum amount and need monthly returns, this can be used for pensioners. This is best alternative to Dividend funds.
Let us see a practical example,
Say you have 3 crores by 2011. You can plan to withdraw 7% every year (21 Lakh) and dividing every month this amount comes to 1,75,000 per month.
Invested amount – 3 crores
Per month withdrawal – 1,75,000
Total withdrawal made for 120 months – 2.1 crores
Current value – 12,78,81,210
Returns % – 20.24
Can you imagine investing 3 crores and that becoming 12 crores. This itself is huge thing and on top of it, you have withdrawn 2.1 crores in this time period.
Fund name is “SBI Small cap fund”
Can you expect this kind of returns after you turn 60? You may be worrying about the risk and everything but in the last 10 years market had witnessed everything.
2011 – Slow down period
2014 – Change in Government
2016 – Greece Crisis & Slow down
2018 – GDP slowdown happened in India
2020 – Covid crash in Market
You can see many events which has happened in the last 10 years but still market has went up and you got much bigger returns.
Let us consider one more mutual fund which is in the market from 1990’s.
HDFC Top 100 fund
As it is Year 2000, let us consider 50 Lakhs as the investment corpus.
Till April 2021 there would have been 252 withdrawals.
Per month withdrawal – 29000
Total withdrawal till now – 73,08,000
Amount available in the Mutual fund – 8,75,21,295
As the NAV has grown the amount left in the corpus is still 8.75 crores. More than 20 years and you had withdrawn beyond your invested corpus and still you have more than 16 times the invested amount.
If you consider this time period,
We had tech burst in 2000,
2008 – Market crash
2009-13 – Slow down period.
Hence this may be strongly recommended for Retired people. This 7% withdrawal is used as thumb rule.
Does Mutual fund AMCs offer this SIP & SWP option ?
ICICI Mutual fund, Motilal Oswal & UTI mutual fund started offering a combination of SIP & SWP together.
ICICI Mutual fund AMC offers Freedom SIP plan as an option. They provide separate Application form where the investors will be provided an option to choose a SIP fund and also an option choose SWP option at the end of SIP tenor.
Below is a snapshot of Freedom SIP plan.
Freedom SIP with Illustration from their own funds,
Investment of 10000 done in ICICI Prudential multicap fund from 1994 to 2014 for a period of 20 years. The accumulated corpus is 2,29,05,160 at 19.48%
Total corpus is shifted to ICICI prudential Balanced advantage fund in October 2014. SWP started from same month with a withdrawal of 50000 per month
Total withdrawal done till January 2023 is 50,50,000 & market value of the available corpus in this fund is 4,33,08,119
Infact the fund has grown from 2.29 crores to 4.33 crores inspite of withdrawing close to 50 lakhs. This is the power of compounding in mutual funds.
Person who is starting his investment journey in his 40s can utilize this SIP feature for investing and SWP feature for withdrawing money like pension during his retirement. Mutual fund can be a suitable retirement solution providing investment product.
SWP VS Dividend option in Mutual Fund
SWP i.e., Systematic Withdrawal Fund is one of the options of Mutual fund. You can use this fund to withdraw money on a fixed date.
Who can use this SWP?
- Retired people who need fixed amount of money like pension
- People who want to send fixed amount of money to their parents/anyone
The biggest advantage of SWP is that it keeps growing and it also keeps providing a fixed amount to you.
In case of Dividend plan which is now called as “Income Distribution cum capital withdrawal” plan. Generally, this is being pushed as monthly income generation plan for many senior citizens and also to others who wants passive income. Dividend plans will not grow as the income is distributed from capital and hence the change in name which happened recently.
Dividends are provided by companies listed in stock market. The extra profit is generally shared with shareholders or it is also the reward for holding it for a year. Any company which gives dividend are considered good companies to invest. Most of the mutual funds have dividend options based on this to attract investors.
Which should I choose among SWP Vs Dividend?
Even as senior citizen after you crossed 60, the chances of you living till 80 or 90 or even till 100 is high. You need money to live the way you want. So SWP can help in growing your money as well as withdrawing a considerable amount of money.
Analysis of SWP in Mutual Funds in the last 10 years:
SBI Small cap fund
Invested amount – 1 crore
Invested Since – 1 / 2 / 2011
Period considered – 9 / 7 / 2021
Every month on 1st you would have received 60,000 which comes around 7.2 lakhs. This is reasonable amount to withdraw for a retired person.
Total amount withdrawn in 126 installments – 75,60,000
Current value on 1st July 2021 – 4,17,77,335
Returns at 19.25%
You had withdrawn almost 75% of your corpus and the available amount for withdrawal is still 4 crores. Again, this is the power of compounding.
Let us take another fund which is in the market from 2004.
ICICI Prudential Value discovery fund
Invested amount – 1 crore
Invested Since – 1 / 2 / 2011
Period considered – 9 / 7 / 2021
Every month on 1st you would have received 60,000 which comes around 7.2 lakhs. This is reasonable amount to withdraw for a retired person.
Total amount withdrawn in 126 installments – 75,60,000
Current value on 1st July 2021 – 2,29,38,548
Returns at 13.83 %
You had withdrawn almost 75% of your corpus and the available amount for withdrawal is still 2.29 crores.
Dividend Option
Considering the same “ICICI Pru Value discovery fund IDCW” option,
Below are the yearly dividends provided,
2011 – 1.5
2012 – 1
2013 – 2
2014 – 2.14
2015 – 3.3
2016 – 2.5
2017 – 3.10
2018 – 4.15
2019 – 3.3203
2020 – 3.0989
2021 – 3.75
Dividend received till date is 29.86 Rs. Total amount withdrawn is 1,43,41,978 (29.86 x 480307.3967)
NAV of this fund in 2011 is 20.82
Number of units with you is 480307.3967 for the invested amount of 1 crore
NAV during 2021 is 29.99 & Current value of this invested amount is 1,44,04,418
Only difference between SWP option and Dividend option is the yearly withdrawal amount. In the first 2 years, the amount came as dividend is just under 5 lakhs. It started increasing as funds started performing well.
*** SBI Small cap fund was not offering dividends regularly. They gave dividends twice in 2015 and once in 2018.
Let us see one another fund which is in the market since 1995, HDFC Flexi cap fund
Below are the yearly dividends provided,
2011 – 4
2012 – 4
2013 – 4
2014 – 4
2015 – 5.5
2016 – 4.5
2017 – 5
2018 – 5.5
2019 – 5.250
2020 – 4.250
2021 – 5
Dividend received till date is 51Rs. Total amount withdrawn is 1,03,99,037 (51 x 203902.6976)
NAV of this fund in 2011 is 49.043
Number of units with you is 203902.6976 for the invested amount of 1 crore
NAV during 2021 is 52.126 & Current value of this invested amount is 1,06,28,632
On an average in this fund, you would have withdrawn 9.5 lakhs every year.
One thing which is clear with this data is that Dividend options can provide yearly income and at the expense of growth. As we had seen out of both of these funds, growth of the fund is limited in case of Dividend option whereas if you use SWP option, growth can help you to see the fund grow multifold.
Case study of investing in SWP option in HDFC Balanced Advantage mutual fund
2011 – 3
2012 – 3
2013 – 3
2014 – 3
2015 – 3.5
2016 – 2.5
2017 – 3
2018 – 5.67
2019 – 3.72
2020 – 3
2021 – 1.38 (till June)
NAV at 28.366 in 2011
Dividend received till date is 34.77 Rs. Total amount withdrawn is 1,10,76,070 (34.77 x 318552.497)
NAV of this fund in 2011 is 31.392
Number of units with you is 318552.497 for the invested amount of 1 crore
NAV during 2021 is 28.36 & Current value of this invested amount is 90,34,148
On an average in this fund, you would have withdrawn 10 lakhs every year and the capital would have gone down to 90 lakhs.
One point to understand here is that the composition of this fund has been changed when SEBI imposed re-categorization of mutual fund schemes.
Capital got depreciated but in 10 years’ timeline you had got amount which is equal to the capital which is much better than other fixed income products available in the market.
Points to note
- Use SWP or Dividend option only with high growth equity funds.
- Balanced advantage or Large cap funds may not be able to provide returns/dividends consistently with growth over the invested amount.
Frequently asked Questions ?
1. Which is best in mutual fund – SWP Vs Dividend ?
Growth of the fund is limited in case of Dividend option whereas if you use SWP option, growth can help you to see the fund grow multifold.
2. Does mutual fund provide pension ?
Mutual fund provides SWP or systematic Withdrawal Plan which can provide regular income just like pension. Advantage with this option compared to other investment product is appreciation of invested value.
3. Which is the best retirement plan to invest ?
SIP in mutual fund can help you in building your retirement corpus and SWP in mutual funds can help in withdrawing a fixed amount on monthly basis just like pension. Advantage of SWP is that the total corpus also keeps growing even after withdrawal. Withdrawal is done at 7% of the corpus and investment may grow at 10% & more.
If you are serious about investing and believe in indian equity market growth then this Mutual Funds course will help you find best mutual funds for investment.