Go Back to Main Page A BEGINNER’S GUIDE TO MUTUAL FUNDS
Regular Cash Flow With Systematic Withdrawal Plans
SWP option helps provide regular cash flows
Many investors assume that mutual fund investments cannot provide regular cash flows. Some others assume that dividends from mutual funds especially debt mutual funds are a good source of regular cash flows. However both stand to be corrected. In case of the former, Systematic Withdrawal Plan (SWP) facility offered by mutual funds helps provide regular cash flows at a defined frequency. In case of dividends, the same are not assured and are subject to availability of distributable surplus from the scheme.
Now let us look at how you can use SWP in debt funds for regular cash flows. Suppose a retired investor invests Rs.10 lakh in a debt fund and desires to receive Rs.10,000 every month. This is how the calculation works –
|
Period
|
Balance Amount Rs.
|
Scheme NAV*
|
Available Units
|
Regular Cash Flow Rs.
|
Monthly Units redeemed
|
Balance Units^
|
|---|---|---|---|---|---|---|
| A= B X C | B | C = A/B=F | D | E=D/B | F=C-E | |
| Month 0 | 1,000,000 | 50.0000 | 20,000 | |||
| Month 1 | 1,008,333 | 50.4167 | 20,000 | 10,000 | 198 | 19,802 |
| Month 2 | 1,006,653 | 50.8368 | 19,802 | 10,000 | 197 | 19,605 |
| Month 3 | 1,004,958 | 51.2604 | 19,605 | 10,000 | 195 | 19,410 |
| Month 4 | 1,003,250 | 51.6876 | 19,410 | 10,000 | 193 | 19,216 |
| Month 5 | 1,001,527 | 52.1183 | 19,216 | 10,000 | 192 | 19,025 |
| Month 6 | 999,789 | 52.5527 | 19,025 | 10,000 | 190 | 18,1834 |
| Month 7 | 998,038 | 52.9906 | 18,834 | 10,000 | 189 | 18,646 |
| Month 8 | 996,271 | 53.4322 | 18,646 | 10,000 | 187 | 18,458 |
| Month 9 | 994,490 | 53.8775 | 18,458 | 10,000 | 186 | 18,273 |
| Month 10 | 992,694 | 54.3264 | 18,273 | 10,000 | 184 | 18,089 |
| Month 11 | 990, 883 | 54.7792 | 18,089 | 10,000 | 183 | 17,906 |
| Month 12 | 989,057 | 55.2357 | 17,906 | 10,000 | 181 | 17,725 |
For illustration purpose only. This should not be solely relied upon to arrive at any investment strategy.
*NAV is assumed to increase by 10% per annum, however the same is not assured and may even decrease
^Carried over to column C for the subsequent month
The above table indicates that while the same amount is withdrawn every month, the units equivalent of Rs.10,000 are reduced from the previous month’s balance units in a rising NAV scenario. Similarly, if the NAV decreases, the number of units redeemed (equivalent to Rs. 10,000) will be higher vis-à-vis the previous month’s balance units.
SWPs are of two types - fixed amount and NAV appreciation. In case of the latter, only the NAV appreciation (if any) is redeemed at a regular frequency while the principal invested remains intact. This option is largely preferred in case of equity funds. In case of the former, units equivalent to a fixed amount are redeemed irrespective of whether the NAV has appreciated or not. This option is preferred in case of debt funds owing to the lower volatility associated with these funds vis-à-vis equity funds. Within debt funds, short maturity bond funds and accrual funds are more suited for SWP.
SUMMARY
There is a popular misconception that only traditional products and not market linked products like mutual funds can provide regular cash flows at a defined frequency. Investors may opt for the SWP or Systematic Withdrawal Plan for regular cash flows especially in case of debt mutual funds as they are relatively less volatile than their equity counterparts. Within debt funds, short maturity debt funds and accrual funds would be relatively better placed for SWP.