What is Systematic Withdrawal Plan (SWP) in Mutual Fund?

Key Features of SWP

Taxes with indexation benefit: SWPs with long-term investment come with tax indexation benefits.

1. Regular return and high gain
   1. In case of fixed deposits, you invest a fixed amount for a specific period with a fixed return amount. However, in SWP you can expect a much higher return with every passing month. If the mutual fund scheme where you have invested in gives out better returns then there are chances that you a better return than fixed deposits.
2. Investment in SIP
   1. In case you receive a regular income, you can reinvest the returns that your mutual fund units yield under the SWP investment. Every month or every quarter, whatever money you get from SWP can be reinvested in another SIP. That means your lump sum investment for an SWP scheme will help you to start an investment in another scheme without having to invest any additional amount from your income.
3. Inflation benefits
   1. Your fixed deposit in the bank will give you a fixed amount without considering the inflation rate. However, an SWP will generate returns in accordance with inflation to balance it out.
   2. Especially, if you choose to invest in a fund which invests in equity and its related securities there are higher chances of receiving inflation benefits.
   3. Low risk: SWPs enable you to withdraw a specific amount of money every month from your account and thus it helps in averaging any volatile turn of the market. Since you can take out amount at regular intervals the risk of losing your entire investment is less in SWPs.
4. Minimum balance
   1. To start an SWP account you must have a minimum balance of Rs.25,000 in your mutual fund. Though this is a lump sum amount that you have to pay before starting the plan, this money will not be locked-in and you can keep withdrawing it in parts over a period of time at regular intervals.

Benefits of SWP

The below-listed are some of the benefits of SWP:

1. Regular Income: With SWP, you get a stable income at fixed intervals. This makes it ideal for anyone needing a periodic income or retired individuals.

1. Customized Withdrawals: In SWP, you can choose how much amount you wish to withdraw and how frequently. You can choose to withdraw monthly, quarterly, or annually, depending on your needs.

1. Tax Efficiency: In comparison to traditional income sources like FD, SWP is more tax friendly. In SWP, profits are taxed as capital gains, generally at lower rates, especially after one year in equity funds.

1. No TDS for Resident Individuals: Unlike fixed deposits or pensions, mutual fund SWPs generally do not attract TDS for resident investors.

1. Compounded Benefits: Even after you withdraw a certain amount, the remaining amount stays invested.

How does an SWP work?

An SWP allows you to withdraw a certain fixed amount from your mutual fund investment at regular intervals. You can choose the withdrawal amount. The rest of your balance money stays invested and continues to grow with the market.

For instance, if you have invested Rs.20 lakh in mutual funds and given instructions for an SWP of Rs.20,000 every month, then the fund manager will redeem units equivalent to your said amount. The rest of your investment will stay as it is and continue to grow.

Taxation on SWP

When you redeem units through an SWP, you incur a profit or capital gain if the Net Asset Value (NAV) at the time of redemption is higher than the NAV at the time of purchase. The capital gain can be short-term or long-term based on the conditions listed below:

1. Equity Oriented Funds: If you redeem your equity fund units within 12 months from the date of investment, they will be treated as short-term gains and will be taxed at 15%. Profits redeemed after 12 months from the date of investment will be treated as long-term capital gains and will be taxed at 10%. Do note that long-term capital gains are tax-free up to Rs. 1 lakh.

1. Non-Equity Oriented Funds: If you redeem your non-equity fund units within 36 months from the date of investment, they will be treated as short-term gains. In such case the gains are added to the investor’s income and are taxed as per the applicable tax slab. If you redeem your units after 36 months, it will be treated as long-term capital gain and taxed at the rate of 20% after indexation benefits.

Do note that there is no TDS charged on capital gains made through SWP. 

Who should Invest in an SWP?

The below listed are some of the cases where you can opt for an SWP:

1. Pensioners: SWP provides income at regular intervals. That is why pensioners can opt for this plan to meet living expenses without fully withdrawing or locking their funds in low-yield options like fixed deposits.

1. Capital Protection: If you have low-risk tolerance, then you can invest in mutual funds with a low to moderate risk level and opt for an SWP to protect your capital in the long run. You can choose to withdraw only capital gains and not the initial investment amount to keep growing.

1. Parents Planning for the Future: If you are a parent who is planning for your child’s future needs, SWP can be a good choice, as it provides a steady income at regular intervals.

1. Freelancers: Freelancers usually have an irregular income schedule. In such cases, meeting day-to-day expenses can be difficult. By investing in mutual funds and opting for an SWP, you are creating a secondary stable income to meet everyday expenses.

1. High-tax Bracket Individuals: Individuals falling in high-tax bracket find opting for SWP beneficial, as there is no TDS charged for capital gains.

Conclusion

To summarise, an SWP is an effective way to manage your investments while generating a regular income. It offers flexibility and tax efficiency, allowing you to meet financial needs without liquidating your entire investment.