Definition: SWP refers to Systematic Withdrawal Plan which allows an investor to withdraw a fixed or variable amount from his mutual fund scheme on a preset date every month, quarterly, semi annually or annually as per his needs.
Description: An investor can customize the cash flows as desired; he can either withdraw a fixed amount or just the capital gains on his investments. SWP provides the investor with a regular income and returns on the money that is still invested in the scheme.
For Example: You have 8,000 units in a MF scheme. You have given instructions to the fund house that you want to withdraw Rs. 5,000 every month through SWP.
On 1 January, the NAV of the scheme is Rs. 10.
Equivalent number of MF units = Rs. 5,000/Rs. 10 = 500
500 units would be redeemed and Rs. 5,000 would be given to you.
Your remaining units = 8,000 – 500 = 7500
Now, on 1 February, the NAV is Rs. 15. Thus, Equivalent number of units = Rs. 5000/Rs. 15 = 333
333 units would be redeemed from your MF holdings, and Rs. 5,000 would be given to you.
Your remaining units = 7500 – 333 = 7167
And so this process continues till the time you want the withdrawals.
Source: Economic Times