SWP: SYSTEMATIC WITHDRAWAL PLAN

Assume a fund growth between 8-9% p.a. (there are many such funds). Effectively such a fund is paying 0.67-0.75% per month.

In reality, returns are not linear. I.e. based on interest rate scenario fund will move up say 1% in a given month and move only 0.1% in yet another month but will grow at 9% on yearly basis.

So how do you make sure you receive the same fixed amount on the same date every month?

So long as you know the fund grows approximately 9% every year, you can set up an SWP of 9% to be paid monthly/ quarterly or yearly basis. Consider this example based on an investment of Rs. 10 lakhs.

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Amount invested = Rs. 10 Lakhs | NAV of 1 Unit = Rs. 10

Hence, units purchased = 1 lakh (10 lakh/10)

Now you know that each month the unit value will move slightly higher, increasing 9% on average for each year, correct? (in one year, NAV will be Rs. 10.90 per unit)

Hence you give a mandate the fund house to sell 0.75% of units on the 1^st of each month (or any other date) and transfer that amount to your bank account. You will receive Rs. 7500 on the 1^st of each month while the fund value will remain Rs. 10 Lakhs.

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Note: Keep in mind that this is a conceptual article so I have rounded the figures to explain the workings of an SWP. In reality, the SWP amount should be set slightly lower (say by 0.10-0.20%) than the rate at which the fund is growing. This is because the annualized rate of 9% assumes that nothing will be sold monthly or quarterly within the year.

For further discussion or to get started with a financial plan, please write in to rajat@sanasecurities.com

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