What Is A Systematic Withdrawal Plan (SWP) In Mutual Funds?

Are you looking for a regular source of income in India - be it for yourself or to support your family back home.

A Systematic Withdrawal Plan (SWP) in mutual funds offers a flexible, regular income by redeeming units periodically, similar to a personal paycheck. Investors can customize the withdrawal amount and frequency, making it ideal for retirees or those seeking supplemental income.

This blog explains how SWPs work, their advantages, and how to start one easily.

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What is a Systematic Withdrawal Plan (SWP) in Mutual Funds?

A Systematic Withdrawal Plan (SWP) is a type of plan that allows you to withdraw fixed or incremental amounts at selected regular intervals, either monthly, quarterly, or annually while investing in mutual fund schemes. To generate the desired cash flow, you will be redeeming units of the mutual fund scheme at chosen intervals.

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How Does SWP Work? (Give an example)

Let's understand this with an example. Assume you invest ₹20 lacs in a mutual fund and opt for- SWP Plan. You set up a monthly withdrawal of ₹10,000 starting one year after the investment date to avoid exit load. At the time of purchase, the Net Asset Value (NAV) was ₹20, so you acquired 1,00,000 units.

The table below explains how units are redeemed after one year to provide you with regular cash flows:

Debt Mutual Fund Information

Month	Prevailing NAV	Units Redeemed	Balance Units (Initial-redeemed)	Fund Value
1	23	434.782 (10,000/23)	99,565	22,89,999
2	22.5	444.444 (10,000/22.5)	99,120	22,30,217
3	24	416.666 (10,000/24)	98,704	23,68,898
4	24.3	411.522 (10,000/24.3)	98,292	23,88,509
5	23.7	421.940 (10,000/23.7)	97,870	23,19,534
6	24.6	406.504 (10,000/24.6)	97,464	23,97,617

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Benefits of Systematic Withdrawal Plan

Some crucial benefits of SWP are:

Regular Income: SWP helps you to generate a regular income, which is ideal for retirees or those looking for a steady income.

Flexibility: You can choose the withdrawal amount, frequency, and the duration.

Capital Appreciation: If the appreciation rate exceeds the withdrawal rate, you will receive regular income and an increased fund value over time. Simply put, even while you are redeeming some funds every month, the remaining investments continue to earn returns.

Rupee Cost Averaging: Since units are not redeemed in one go, rupee cost averaging helps average returns over both high and low market phases.

Tax Efficiency: Investment in equity/equity-oriented plans provides better tax efficiency in case of long-term withdrawals. Up to Rs 1.25 lacs are tax-free annually, and anything above attracts only 12.5% tax. Whereas when compared to other popular investments like FDs, the interest income is taxed at the investor's highest tax bracket, usually around 30%.

Peace of Mind: SWP offers peace of mind as it provides you with a regular source of income, which can be helpful in situations of financial distress such as job loss or unexpected expenses.

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Who Should Opt for SWP in a Mutual Fund?

A systematic Withdrawal Plan in mutual funds is best suited to the following individuals:

Retirees: Retired individuals who don't have a pension can get one through SWP by investing a large sum.
Regular Income Seekers: SWP can be used to create an additional source of income.
High Tax Slab Individuals: Since capital gains on equity/equity-oriented funds are moderate, they attract investors with high tax slabs.

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Effective Ways of Using SWP

Some of the effective ways of using SWP you should keep in mind are:

Start Early: An early start can be an intelligent strategy to help you accumulate substantial wealth over time. Starting early also helps you test the SWP setup, providing time to fine-tune your withdrawal rate, fund selection, and frequency according to your lifestyle and financial goals.

Choose a fund that aligns with your risk tolerance and financial goals: you should choose a fund as per your risk tolerance and financial goals. If you have a conservative approach focused on capital preservation, debt or low-risk hybrid funds are often the best choice, and if you have a higher risk tolerance or a longer investment horizon, balanced funds or equity-oriented funds can be considered.

Select the correct withdrawal rate: Select a withdrawal rate less than the fund's average annual return. Generally, a 4 to 6% annual withdrawal rate is considered safe without depleting your capital.

Reinvest for Tax efficiency: Only the capital gains portion of each withdrawal is taxed, and up to Rs 1.25 lacs is tax-free annually for equity funds. You can reinvest any excess gains or unutilized portions of your SWP payout in other schemes.

Review and adjust if needed: It is essential to review your withdrawals regularly, as over-withdrawals can reduce your capital. Reducing the withdrawal rate, especially during market downturns, can protect capital.

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How to Start SWP in Mutual Funds Online With iNRI

Just follow these three simple steps to start SWP with iNRI:

Step One: Go to your Portfolio

Step Two: Click on the "Three Dots" icon of the fund

Step Three: Chose SWP Option and select your preferences

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Tax Implications of a Systematic Withdrawal Plan

The tax rate on SWP varies as per the fund type and the investment duration:

In the case of equity/equity-oriented funds:some text
1. Short-term capital gains(Less than a year): taxed at 20%.
2. Long-term capital gains(more than a year): tax-free up to Rs 1.25 lacs annually; anything above is taxed at 12.5%.
In the case of debt-oriented funds, any capital gains from these funds, regardless of the holding period, will be taxed at the applicable income tax slab rate.

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To learn more about taxation, connect with one of our tax experts.

Link Button Tax Experts�

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Difference Between SIP and SWP

Debt Mutual Fund Information

Particulars	SIP	SWP
Meaning	SIP allows investors to invest regularly in the mutual fund scheme.	SWP allows investors to withdraw fixed amounts regularly from the mutual fund scheme.
Objective	To accumulate wealth in the long run.	To generate regular income.
Direction of Cash Flow	Money flows from the hands of investors into a mutual funds scheme.	Money flows out of mutual funds to investors' bank accounts.
Taxation	SIPs are taxed only at the time of redemption. However, SIPs in some mutual fund schemes, like ELSS, are eligible for tax deductions under section 80C.	SWPs are taxed if there is capital gain during unit redemption, and the tax amount depends on the holding period and the fund type.
Ideal For	Long-term investors who are looking to create wealth.	Retirees/ people who are seeking regular income.

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Conclusion

SWP has gained traction in the past few years due to its advantages. It is suitable for everyone, whether you are retired, a working professional, or facing an unexpected career break. It offers flexibility, tax efficiency, and regular income, making it an attractive option for managing cash flow needs. Whether you are looking to supplement your income or ensure a steady cash flow in retirement, SWP can help you achieve your financial goals.

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Frequently Asked Questions (FAQs): What Is A Systematic Withdrawal Plan (SWP) In Mutual Funds?

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When do I use a Systematic Withdrawal Plan?

If you want an additional regular income, you can use a SWP.

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Does SWP in Mutual Funds Work Best for Retirees?

Yes, it can give retirees a stable regular income without depleting their capital when the withdrawal rate is less than the appreciation rate.

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Is SWP better than FD?

SWP has advantages over FDs and provides investors more flexibility than fixed deposits. In SWP, a long-term capital gain of up to Rs 1.25 lacs annually is exempt. Anything above is taxed at 12.5%, whereas in FD, the returns are fully taxable as per the slab rate, which can go up to 30%. Further, mutual funds have no lock-in period and offer the flexibility to withdraw funds at any time. While FDs come with a lock-in period, and premature withdrawals attract interest penalty.

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Can SWP be stopped anytime?

Yes, investors can stop the SWP anytime.

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Is SWP better than SIP?

Both serve different purposes and are not directly comparable, as they operate in opposite directions. SIP is ideal if you're looking to build wealth through disciplined investing. Conversely, if you need regular income from your investments, SWP offers flexibility and liquidity.

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