What is a Systematic Withdrawal Plan?
An SWP or Systematic Withdrawal Plan is a feature offered by all mutual fund schemes that allows you to withdraw a regular income from pre-existing mutual funds. So, instead of redeeming the entire money accumulated in your mutual fund scheme, you can choose to withdraw the funds in a staggered manner at your desired frequency and amount that you prefer to receive in each period. An SWP plan may be used to receive regular payment during retirement or any such time that a regular income is needed.
What is meant by NAV of mutual funds?
The NAV of a mutual fund is a function of the net assets under management of the company and the outstanding number of units in the fund. The transaction in a mutual fund is a continuous process that happens throughout the day. Therefore, the NAV of funds keeps changing. In an open-ended scheme, the NAV of the fund changes each day and is thus calculated at the end of each day. In a closed ended scheme, the NAV is not calculated so often. The NAV is also used to track the historical performance of mutual fund schemes.
What is the formula for NAV?
The formula to calculate the NAV is:
NAV = Total asset – Total liabilities and expenses / total outstanding units
Here. total assets refer to all the holdings of the mutual fund in its portfolio including all the assets like bonds, stocks, all investments and securities in the portfolio of the fund.
Total liabilities are the different types of fees like the distribution, management, administration fees, and taxes etc. Since all these fees contribute to the overall cost structure of the mutual fund, they are also included in the liabilities.
How does NAV affect SWP in mutual funds?
During redemption, in SWP too, the NAV of the fund applied is the one that is on the day of redemption or the SWP date. Your earnings during redemption from the mutual fund depend on the prevailing NAV at the time of redemption. Similarly, during SWP too, the prevailing NAV is taken into consideration.
Therefore, when the NAV is low, it means more units of the fund are required to be redeemed to pay you the SWP amount. If on the other hand the NAV is rising, then the number of units you would need to redeem would be lesser to arrive at the SWP amount.
So, a NAV rising at a higher value than the withdrawal rate will mean that your investment value will undergo appreciation. If on the other hand, the NAV of your SWP fund falls below your withdrawal rate, then you stand to lose out on the value of your investment.
Remember, that you cannot control the NAV of your SWP plan. At best you can plan a withdrawal amount that is lower than the rate of expected returns on your SWP investment. Contact your mutual fund distributor to understand how you can align your requirements for the best SWP plan.
