What are SWP mutual funds?
An SWP mutual fund is a fund that allows a systematic withdrawal plan from pre existing mutual funds. This means that instead of redeeming the entire amount at one go, you can plan to withdraw a fixed income regularly from your mutual fund in which you have already accumulated a corpus. Besides deciding on the amount you want to receive as regular income you can also choose the frequency of withdrawal like monthly, half yearly or quarterly
The amount you choose to receive as income should be such that the Principal amount in the pre existing mutual fund is sufficient to provide it over the period you have planned. This is a delicate balance as you need to calculate meticulously the amount of withdrawal in view of the rate of returns the remaining funds in the plan is expected to earn. This seems daunting, but can be quite easily calculated with a free SWP calculator available online readily
What is an SWP calculator and how does it help to plan SWP income?
An SWP calculator is an online tool that calculates how the Principal amount in the SWP fund gets reduced when you receive from it regular income of fixed amounts spread over a specified period. Once you feed in the required details in the calculator, it immediately gives you the result as to how much funds will be remaining, if at all, at the end of your withdrawal period. Therefore, by changing the different variables required in the calculation, you can arrive at a point that will let you choose the best SWP plan as per your requirement.
Let us understand this with an example.
Let us say you have a mutual fund containing 5000 units each with NAV Rs 10. The corpus you have in your mutual fund is Rs 50,000/- Let us say you plan to receive Rs 2000 per month for a year from the SWP plan. In the first month, the amount remaining in the SWP fund will be Rs 50,000 -Rs 2000=Rs 48000/- and the units remaining are 5000- 200= 4800 units
In the next month let us say the NAV of the fund increases to Rs 20/- In this month the amount remaining before Rs 2000/ is withdrawn is Rs 20 X 4800= Rs 96000/- The withdrawal of Rs 2000/ means only (2000/nav)= 2000/20= 100 units are sold to provide the amount. This leaves 4800-100=Rs 4700 units in the fund @ Rs 20 per unit. The amount is Rs 20X 4700= Rs 94000/-
The above calculation is quite cumbersome when we want to do future projection for SWP withdrawals since the NAV of mutual funds do not always remain the same. An SWP calculator makes the entire exercise quite easy as you just have to furnish the details like Principal amount, amount to be withdrawn at each interval, expected rate of returns, frequency of withdrawals, and the number of withdrawals or the period over which you want to receive the regular income.
Use an online SWP calculator to plan your SWP mutual fund scheme and the income you can receive per interval along with the period over which you may receive it.
