Step-by-Step Guide to SWP (Systematic Withdrawal Plan)

 Step-by-Step Guide to SWP (Systematic Withdrawal Plan)

[🎵] Introduction
Hello friends, we’ll dive into SWP (Systematic Withdrawal Plan) in today's article. You’ll learn:

1. What is SWP?
2. How is SWP done?
3. How can SWP be structured to maximize withdrawals while ensuring capital growth?

Let’s begin this step-by-step journey to understand everything about SWP!

---

[🎵] What is SWP?

SWP, or Systematic Withdrawal Plan, is a feature offered by mutual funds that allows investors to withdraw a fixed amount periodically from their invested funds. It provides a steady cash flow, but the withdrawal comes directly from your investment corpus, not from any external source.

Example:

• You invest ₹1,00,000 in a mutual fund.
• You set up an SWP to withdraw ₹5,000 per month.

If the market rises, your remaining corpus grows. If the market falls, your withdrawal reduces the corpus further, which can deplete your funds faster.

Key Point: The withdrawal amount is directly linked to market performance, so a falling market can impact your fund significantly if not managed properly.

---

[🎵] How SWP Works in Mutual Funds

Let’s break it down:

1. If the market rises, your remaining investment corpus grows after withdrawal.
2. If the market falls, withdrawals will come from the reduced corpus, which can lead to quicker depletion.
3. SWP doesn’t generate additional income—it withdraws from your existing investment.

Example:

• Initial investment: ₹1,00,000.
• Market falls by 20%: Your corpus reduces to ₹80,000.
• Monthly withdrawal: ₹5,000. After the first withdrawal, you’re left with ₹75,000.

If this cycle continues, your funds can run out quickly in a volatile market.

---

[🎵] How to Do SWP Correctly for Maximum Withdrawal and Capital Growth

To execute SWP effectively, you need a strategy. Follow these steps:

Step 1: Choose ETFs Instead of Mutual Funds

• ETFs (Exchange Traded Funds) are better for SWP because they are diversified, listed on exchanges, and have lower expense ratios.
• ETFs are less likely to go to zero, providing safety while offering excellent returns.

Step 2: Limit Your Monthly Withdrawal

• Withdraw 1% of your total investment corpus each month.
• For example, if your investment corpus is ₹1,00,000, withdraw only ₹1,000 per month.

Step 3: Build Your Portfolio Gradually

1. Divide Your Investment:

   • Split your ₹1,00,000 into 10 equal parts of ₹10,000.

2. Use RSI (Relative Strength Index):

   • Invest only in ETFs with an RSI below 30 (oversold level).
   • ETFs with an RSI below 30 are undervalued and have higher potential for growth.

3. Choose a Diversified Portfolio:

   • Include 10 ETFs in your portfolio, ensuring diversification:
     • 4-5 broad-based ETFs (e.g., Nifty 50, Midcap, Junior Nifty).
     • 2-3 sectoral ETFs (e.g., Auto, Pharma, EV).
     • 1-2 commodity ETFs (e.g., Gold, Silver).
     • 1 international ETF (e.g., Nasdaq or Hang Seng).

Step 4: Invest Systematically Over 1 Year

• Start investing in ETFs below RSI 30.
• Complete your investments within 12 months.
• Do not withdraw any amount during the first year.

Step 5: Withdrawal Strategy After 1 Year

1. Sell ETFs Above RSI 70:

   • If an ETF’s RSI goes above 70, sell a portion (e.g., ₹7,000 if ₹10,000 was invested).
   • Withdraw ₹1,000 (as per the 1% rule) and reinvest the remaining ₹6,000 in ETFs below RSI 30.

2. Sell Gradually Based on RSI Levels:

   • If no ETF reaches RSI 70, sell from ETFs at lower levels (e.g., RSI 60, 50, or 40) to meet your withdrawal needs.

3. Reinvest Surplus:

   • Use the remaining amount after withdrawal to reinvest in ETFs with RSI below 30.

---

[🎵] Example of the SWP Process

Scenario:

• Investment: ₹1,00,000 (divided into 10 ETFs of ₹10,000 each).
• Month 1:
  • ETF A goes above RSI 70 → Sell ₹7,000, withdraw ₹1,000, reinvest ₹6,000.
• Month 2:
  • ETF B goes above RSI 60 → Sell ₹6,000, withdraw ₹1,000, reinvest ₹5,000.
• Month 3:
  • ETF C remains at RSI 30 → No sale; reinvest any surplus.

By following this disciplined approach, you ensure:

1. Regular cash flow through withdrawals.
2. Portfolio growth by reinvesting in undervalued ETFs.

Example of Withdrawal Execution:

• ETF A (₹10,000): RSI = 72 → Sell ₹1,000 worth of units.
• ETF B (₹10,000): RSI = 55 → If no ETF crosses 70, sell ₹1,000 here.
• ETF C (₹10,000): RSI = 40 → No action taken.

---

[🎵] Why This SWP Strategy Works

1. Diversification: A mix of broad-based, sectoral, commodity, and international ETFs reduces risk.
2. RSI-Based Investing: Buying undervalued ETFs (RSI below 30) and selling overbought ETFs (RSI above 70) maximizes returns.
3. Controlled Withdrawals: Limiting withdrawals to 1% of the corpus ensures capital longevity.

---

[🎵] Conclusion

Friends, SWP can provide you with consistent income while growing your investment, but only if done correctly. Following this ETF-based strategy with RSI guidance ensures your withdrawals are sustainable, and your capital grows over time.

Data set for 20 years with 1 % withdrawal on investment of 5Lacs where 12% Annual returns from Market as follows