Just like one can systematically invest in mutual fund plans, he/she can also set up a systematic withdrawal plan to receive a stream of regular income from investment every month on a fixed date. It can be a fixed or a variable amount. It is typically used on retirement and allows investors to withdraw monthly, semi-annually, quarterly, or annually.
Understanding Systematic Withdrawal Plan (SWP)
A systematic withdrawal plan is the opposite of SIP. It allows you to create a series of receivables from your mutual fund investment regularly on a pre-decided date. Unlike lump-sum withdrawal, SWP will enable investors to customise withdrawal from the corpus in a phased way.
You can withdraw the capital gain or a fixed amount, whereas the residue gets reinvested in the scheme. This way, you can stay invested for a long time and receive a regular income. The receipt can be reinvested or used to meet cash requirements.
Let’s understand with an example.
Suppose you invested Rs 100,000 in a mutual fund for one year and decided to withdraw Rs 5000 per month. So every month, your investment amount will get reduced by Rs 5000 and paid to you. The remaining amount after each month will continue to generate returns from the investment.
Key features of an SWP
SWP creates regular income by redeeming units at a specified interval. The number of units dissolved will depend upon the NAV value on the withdrawal date.
Here are the key advantages of an SWP scheme
SWP allows investors to select the amount, date, and frequency to receive income from an SWP. Also, one can stop it at any time.
SWP lets mutual funds investors receive a steady income from their investment. Hence, investors needing a stable cash flow for meeting everyday expenses, like the retired investors, can invest in SWP schemes.
The regular withdrawal is less than the returns earned from the investment. Hence, the investors get some capital appreciation in the long run.
There is no TDS deducted on SWP for resident investors.
Who can invest in an SWP?
Investors wanting to create a secondary source of income:
Investors use SWP to create a secondary source of income from their long-term investment. It helps ride over the rising cost of living.
Investors looking for capital protection:
Investors who prefer protection over returns can invest in low or medium-risk mutual funds and receive the capital gain as a regular fixed income.
Investors need a retirement income:
Investors can use an SWP scheme as a pension income by investing a retirement corpus in mutual funds. They can select a scheme based on their risk appetite and the frequency to receive payment from the capital gain.
Investors in the high tax bracket:
Individuals at the higher tax bracket can invest as there is no TDS deduction on investment. The capital gain from the equity funds are also moderately taxed, and so are the debt funds after applying indexation.
Why is SWP a good investment?
As an investor, you may know that market fluctuations can directly impact your returns from mutual funds investment. Meaning, it affects the NAV and lowers the value of the asset if not withdrawn on time.
With an SWP plan, you can withdraw as per your financial needs. If your goal requires funding in a phased manner, you can facilitate cash requirements with an SWP.
An SWP can help protect the value of your investment, especially when the market is choppy, with regular withdrawals.
Secondly, investors who want to plan their retirement income can do so with an SWP plan. It allows them to receive fixed income regularly on a fixed date to meet cash expenses.
How can you withdraw from SWP?
SWP in mutual funds allows investors to customise their withdrawal plans. Individuals can receive a specified amount monthly, half-yearly, quarterly, or annually. You can withdraw only the appreciated amount with appreciation withdrawal while your principal amount remains invested to earn returns.
How does an SWP work?
One important thing to understand is that SWP isn’t quite like a fixed deposit. With a fixed deposit, your principal amount remains unaffected by market fluctuations. But, for SWP in mutual funds, the NAV value fluctuates with the rise and fall in the market, impacting your investment’s final value. It also reduces by the number of units redeemed with every withdrawal.
Let’s say you have 10000 units in your mutual fund scheme, and you wish to withdraw Rs 5000 monthly. In the first month, if the NAV value is Rs 10, you need to redeem 500 units to receive Rs 5000. Your invested units get reduced by (10000-500) or 9500.
Now in the second month, let’s assume the NAV value increases to Rs 25, then you will have to redeem 200 units to get Rs 5000. So, after the second month, you will have (9500-200) or 9300 units in your mutual fund. Hence, with every withdrawal, the investment value will reduce, which will impact the final returns on investment.
Taxation of SWP mutual funds
Withdrawals from SWP are subject to taxation. The capital gain realised from investing in debt funds for less than 36 months will get added to the total income. If the investment period stretches over 3 years, a 20 percent capital gain tax will apply after indexation.
In the case of equity funds, a 15 percent short-term capital gain tax will apply for a holding period of less than a year. On the other hand, if you invest over a year, the applied tax rate is 10 percent without indexation.
- A systematic withdrawal plan allows investors to customise and create a second income stream from their mutual fund investment.
- Investors receive returns on a specific date either by a fixed amount or variable.
- Investors who don’t receive a pension can use SWP as retirement income.
- SWP helps individuals in the higher tax bracket. There is no TDS deducted on the SWP withdrawal. The capital gain from equity fund investment is taxed at a lower rate, and debt funds are taxed at 20 percent after applying indexation.
The bottom line
Understanding your options in selecting an SWP can take time. Therefore, we suggest you evaluate all your options before investing. Most of the mutual funds will allow you to establish a systematic withdrawal plan.