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Systematic Withdrawal Plan (SWP) in Mutual Funds

09 September 2024

Systematic Withdrawal Plan (SWP) in Mutual Funds

A Systematic Withdrawal Plan (SWP) is a strategic approach for investors who want to generate a regular income from their mutual fund investments. By setting up an SWP, you can withdraw a fixed amount of money at regular intervals—monthly, quarterly, or annually.

This helps provide a steady cash flow while keeping the rest of your investment intact and growing. You can customise the withdrawal amount, adjust the frequency, and switch between different mutual fund schemes to align with your changing financial needs.

Keep reading to know more about systematic withdrawal plans and how they work.

What is a SWP?

Before anything, let’s first understand what a Systematic Withdrawal Plan (SWP) is and why it might be useful for you:

Definition of SWP

Think of a SWP as a way to get regular payouts from your mutual fund investment. Here’s how it works:

You choose a mutual fund you’ve invested in.
You regularly tell the fund company how much money you want to withdraw.
The fund company automatically sells some of your units and sends you the money.

Purpose of SWP

People use SWPs for different reasons, but here are the main ones:

Regular Income: If you need a steady stream of money, perhaps for retirement or to supplement your salary, an SWP can provide that.
Flexibility: You decide how much you want and how often. It’s your money on your terms.
Stay Invested: While getting payouts, the rest of your money stays invested and can grow.
Tax Management: SWPs can be more tax-efficient than withdrawing large lump sums.
Discipline: It helps you avoid the temptation to withdraw too much at once.

How Does SWP Work?

Let’s examine how a Systematic Withdrawal Plan (SWP) works. It’s a straightforward process that allows you to control your investment income.

Fixed Withdrawals

Setting up fixed withdrawals is the first step of a SWP – You only need to set it up once. Here’s how it works:

Choose your fund: Pick a mutual fund that aligns with your goals.
Decide your amount: Figure out how much you want to withdraw regularly.
Set it up: Tell the fund house your withdrawal amount and bank details.
Let it run: On each withdrawal date, the fund house sells enough units to meet your specified amount and sends it to your bank account.

Frequency of Withdrawals

SWPs are flexible. You can choose how often you want to receive money:

Monthly: Great for covering regular expenses.
Quarterly: Ideal if you need larger sums less frequently.
Annually: Perfect for annual expenses or if you have other income sources.

Some fund houses even offer weekly or fortnightly options. Pick what works best for your financial needs and cash flow requirements.

Impact on Fund Units

Every time you make a withdrawal, it affects the number of units you hold:

The fund house calculates how many units they need to sell to meet your withdrawal amount.
These units are redeemed at the current Net Asset Value (NAV).
Your total unit count decreases with each withdrawal.

For example, if you withdraw ₹5,000 and the NAV is ₹50, 100 units would be redeemed. Your remaining units continue to earn returns based on the fund’s performance.

Benefits of SWP

Systematic Withdrawal Plans (SWPs) offer some great benefits that might make them the right fit for your financial needs. Some of these include:

Regular Income

Think of a SWP as putting your investment to work for you. You set the amount and frequency, and your investment dutifully transfers money to your account. This makes the plan perfect if you’re looking for a reliable income stream to cover your monthly expenses or supplement your earnings.

Tax Efficiency

Unlike lump-sum withdrawals, which can push you into a higher tax bracket all at once, SWPs spread your income over time. This will help keep you in a lower tax bracket, saving you money. Plus, if you’re withdrawing from equity mutual funds and have held them for over a year, you’ll benefit from lower long-term capital gains tax rates.

Rupee Cost Averaging

When you withdraw a fixed amount regularly, you’re buying fewer units when prices are high and more units when prices are low. This is called Rupee Cost Averaging, and it can work in your favour over time. It means you’re less likely to withdraw all your money when the market is down, which could lock in losses. Instead, you’re spreading out your withdrawals, potentially giving your remaining investment more time to grow.

Setting Up an SWP

Are you ready to set up a Systematic Withdrawal Plan (SWP)? Let’s walk through the process step-by-step. It’s easier than you might think.

Choosing the Right Fund

First, you must pick the right mutual fund for your SWP. Here’s what to look for:

Performance: Choose a fund with a solid track record. Look at its performance over the last 3-5 years.
Size: Bigger funds are often more stable. They’re less likely to run into cash flow issues when you’re making regular withdrawals.
Investment style: Make sure the fund’s approach matches your risk tolerance. A balanced or debt fund might be a good fit if you’re conservative.
Expenses: Keep an eye on the fund’s expense ratio. Lower fees mean more money in your pocket.

Deciding the Withdrawal Amount

Now, how much should you withdraw? Here are some factors to consider:

Your needs: Start with how much income you need. Be realistic!
Fund performance: Don’t withdraw more than the fund is likely to earn. This helps your investment last longer.
Inflation: Factor in rising costs over time. You might need to increase your withdrawals periodically.
Tax implications: Remember, your withdrawals may be taxable. Plan accordingly.

A common rule of thumb is to withdraw no more than 4-5% of your investment value annually. But your situation might be different, so adjust as needed.

Initiating the SWP

Now that you have everything in place, just start your SWP by following these steps:

Contact your fund provider: You can do this online, by phone, or in person.
Fill out the SWP form: You’ll need to provide details like your fund choice, withdrawal amount, and frequency (monthly, quarterly, etc.).
Set up your bank account: Make sure the fund company has your correct bank details for transfers.
Choose a start date: Pick when you want your first withdrawal to happen.
Submit and wait: Once you’ve submitted your form, processing usually takes a few days.

That’s it! Once your SWP is set up, you’ll start receiving your regular payouts.

SWP vs. Other Withdrawal Methods

When it comes to withdrawing money from your investments, you’ve got a few options to consider. Let’s break down Systematic Withdrawal Plans (SWPs) and how they stack up against other investment types like lump-sum withdrawals and dividend payouts.

SWP vs. Lump-Sum

With an SWP, you’re setting up a regular ‘salary’ from your investments. You decide how much you want to withdraw and how often, and the money comes to you like clockwork.

On the flip side, a lump-sum withdrawal is exactly what it sounds like – you take out a big chunk of money all at once. This can be tempting if you need a large amount of cash quickly, but it has some drawbacks.

SWP vs. Dividend Payout

Now, let’s talk about SWPs versus dividend payouts. Both can provide you with regular income, but they work differently. With an SWP, you’re in control. You decide how much you want to withdraw and when – it’s predictable and reliable. Dividend payouts, however, can vary depending on how well the fund or stock is doing. It’s less predictable, which can be tricky.

The Bottom Line

Setting up a Systematic Withdrawal Plan (SWP) allows you to create a reliable income stream from your mutual fund investments while still benefiting from potential market growth. With SWPs, you can control the pace and amount of your withdrawals, making them a versatile tool for various financial goals.

Plus, Appreciate’s platform simplifies the process of managing your SWP, offering easy setup, automated features, and intelligent insights to maximise your returns and ensure tax efficiency. Download the app now!

Systematic Withdrawal Plan FAQs

What is a SWP in mutual funds?

A Systematic Withdrawal Plan (SWP) lets you withdraw a fixed amount from your mutual fund investment at regular intervals. This provides a steady income stream while keeping the remaining funds invested.

How is a SWP different from a Systematic Investment Plan (SIP)?

SWP involves withdrawing money periodically from an existing investment, while SIP entails regularly investing a fixed amount into a mutual fund. Essentially, SIP builds your investment over time, whereas SWP provides a systematic way to redeem it.

What are the tax implications of withdrawals through SWP?

If you withdraw gains within the first year, they are treated as Short Term Capital Gains (STCG) and taxed at 15%. Withdrawals after one year are considered Long Term Capital Gains (LTCG) and are taxed at 10%.

Can I change the withdrawal amount in an SWP?

You can adjust the withdrawal amount and frequency based on your financial needs. Additionally, you can switch between different mutual fund schemes as part of your SWP.

Which type of mutual fund is best for SWP?

Debt mutual funds are generally preferred for SWP due to their lower risk and more stable returns. They provide a more predictable income stream than equity funds, subject to market fluctuations.

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