Spotlight: Systematic Withdrawal Plan

A Systematic Withdrawal Plan (SWP) refers to an option which allows you to redeem/ withdraw a regular sum of money from your investment in a mutual fund scheme. If you require a fixed sum every month from your mutual fund investment, then this can be planned by choosing an SWP option specifying the amount required per month. The manner in which this works is that units in the scheme equivalent to the required amount specified per month will be redeemed and paid to the investor.
For the purpose of illustration, consider a situation wherein there is a sum of Rs. 300,000 worth of units in a particular debt oriented fund of the investor. The investor has purchased these units at a Net Asset Value (NAV) of Rs. 20.00 so there are a total of 15,000 units in his account. The investor now chooses to receive a fixed payout of Rs. 10,000 per month for the next six months. In such a situation every month some units of the scheme will be redeemed, which will be equivalent to the fixed sum required per month. In the first month if the net asset value is Rs. 20.20, a total of 495.05 units will be redeemed. At the end of the next month, suppose the net asset value might have moved up to Rs. 20.30, hence in that case only 492.61 units will be redeemed and so on. 
The benefit of choosing SWP option is that the existing investment of the investor continues to earn the returns that are generated by the fund. Only a fraction of the unit's equivalent to
the amount required for each month is redeemed. SWP may be subject to exit load, depending on the nature of scheme and its holding period. There is another benefit available, for units held for more than 1 year in case of debt oriented funds by way of lower taxation on capital gains. The difference between the cost price and the sale price of the units is treated as capital gains and taxed at concess-ional rates, so the tax impact is lower compared with income earned from other traditional investment options like interest on deposits where the entire earnings is considered as income and taxed at applicable slab rates. Given the individual tax implications, investors are requested to consult their investment / financial / tax advisor before making any investment decision.
Suitability for the investor
The use of the SWP is beneficial for retired individuals / senior citizens because they typically prefer a regular cash flow. They can invest in debt oriented funds and then choose to enjoy a regular payout that will come to them at specified frequency. Even someone who requires a regular flow of money for some specific goals such as paying fees for children's education or towards household expenses can use the SWP to structure his cash flows.