As a Mutual Fund Investor, Do You Know About the New Twist in Systematic Withdrawal Plans?

A look at the latest percentage-based withdrawal option offered in mutual fund SWPs

 Systematic Withdrawal Plans

A Systematic Withdrawal Plan (SWP) is a mutual fund investment that you can use to get a regular income. While investing in an SWP, mutual fund investors could mention the amount intended to withdraw every month. In a recent change, you can now mention a percentage instead of the amount you wish to withdraw.

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A Makeover in SWPs

Some Asset Management Companies (AMC) are now giving mutual fund investors the option of mentioning a percentage of withdrawal from the investment. When a withdrawal becomes due, units equal to the rupee value of the percentage get redeemed and the money is paid to the investor. 

You may have invested in SIP mutual fund or lump sum as an investor. When you apply for SWP, the AMC calculates the total value of your fund investment as of the date of the application. The percentage of withdrawal will be based on this value.

Motilal Oswal Mutual Fund introduced this variant of regular SWP. Motilal Oswal Fixed Amount Benefits (MFAB) plan will give regular cash flow opportunities to investors from existing schemes of Motilal Oswal Mutual Funds. MFAB was earlier known as CashFlow Plan.

Another option you can consider is the percentage-based SWP with a top-up option. For example, with ICICI Prudential’s Freedom SWP, you can go for, let’s say, 5% SWP on your fund value of Rs. 10 lakh with a top-up of 2%. Accordingly, you will receive Rs. 5,000 monthly in the first year. Next year, the monthly receipt will increase to Rs. 5,100 thanks to the 2% top-up.

Whichever option you choose, you must remember that you cannot change a fixed amount SWP to a percentage-based SWP mid-way. You can, however, cancel an SWP and change its duration or withdrawal amount. You may choose not to set a duration for the SWP at all. In this case, the SWP continues till the fund exists or the investor cancels it.

Also Read: How did investors get almost Rs 46 lakhs on monthly SIP Rs 10000? Mutual fund scheme you should know

Which SWP Option to Choose?

At first glance, a fixed amount may look simplistic, while a percentage-based SWP may seem complex. But a fixed amount cannot conserve your fund as percentage-based withdrawal can. For example, if you withdraw Rs. 40,000 per month, a smaller corpus may be depleted quickly. However, choosing a 5% SWP means your fund will last at least 20 years. Besides, the growth in the fund during the SWP tenure will ensure that it lasts even longer.

SWP is an option offered by mutual fund schemes rather than it being a category of mutual funds. Your risk appetite and financial goals remain just as relevant while selecting a fund for systematic withdrawal in the future.

Also Read: Mutual funds and frontrunning: What you need to know


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