[ecis2016.org] SWP or Systematic Withdrawal Plan is a market machinery facilitating a regular income for the investors, and withdraws any amount left in the scheme.
What does SWP mean?
SWP, or Systematic Withdrawal Plan is a market machinery facilitating a regular income for the investors, and withdraws any amount left in the scheme. The system offers a customised withdrawal of cash flow, which could be either in the form of an already set amount, or on the profits of the investment.
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SWP explained with example
Let’s take the help of an example to understand this SWP better. Suppose you have 5,000 units in a scheme for mutual funds. Out of the 5,000 units, you have customised some specific instructions for withdrawing Rs 3,000 every month, according to the SWP.
On January 1, 2022, the net asset value, or NAV, of the mutual fund scheme was 10. NAV refers to the price paid for one unit of a particular scheme. The equivalent mutual fund units which you would receive would be 3,000/10 = 300 units.
According to the fund scheme, 300 units would be redeemed, whereas Rs 3,000 would be given to you. Now, of the initial 5,000 units, 4,700 units remain.
On February 1, 2022, the scheme’s NAV jumped to Rs 12. The equivalent mutual fund units which you would receive would be 3,000/12 = 250 units.
Now, again 250 units would be redeemed, whereas Rs 3,000 would be given to you. The net calculation for the remaining units comes out to be 4,700-250 = 4,450 units. This calculation would continue on similar grounds.
How to calculate SWP easily?
SWP calculators determine the monthly withdrawals from the investments in the mutual fund scheme. After the withdrawal of a particular amount, it assesses the net value of the investment. SWP could also be one of the steady sources of income after retirement. The calculator comprises a formula box, to add details like amount withdrawal per month, time period of the investment, total amount of the investment, and expected rate of returns on an annual basis.
Working of a SWP calculator
The mathematical formula used is:
A = PMT 1+𝑟𝑛𝑛𝑡−1𝑟𝑛
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A = investment’s future value
PMT = payment required for each period of time
n = no.of compounds in a given time period
t = no. of times the money is currently invested
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