What is SWP in mutual funds?

A systematic withdrawal plan or SWP is a mutual fund strategy that redeems a fixed or variable amount of units at scheduled intervals. It provides you with regular payouts from your mutual fund investment while continuing to benefit from potential future capital appreciation.

How does SWP in a mutual fund work?

In a systematic withdrawal plan, you’re required to set a predetermined withdrawal frequency and amount. At each preset interval, the fund automatically redeems the corresponding number of units to meet your fund withdrawal requests.

Which is better: SWP or FD?

Although both options can provide you with a regular source of income, the choice between a systematic withdrawal plan (SWP) in mutual funds and a fixed deposit (FD) depends on individual financial goals, risk tolerance and liquidity needs. With SWPs, there’s a potential for future capital appreciation, whereas there isn’t any such potential with FDs. However, the potential for capital preservation is much higher with fixed deposits than with systematic withdrawal plans.

What is the SWP interest rate?

Unlike fixed-interest investments like fixed deposits (FDs), a systematic withdrawal plan (SWP) doesn't have an "interest rate" in the traditional sense. SWP involves redeeming units of a mutual fund at predetermined intervals, and the amount withdrawn is determined by the number of units redeemed and their Net Asset Value (NAV) at that time.

No, the SWP is not 100% tax-free. The amount withdrawn comprises capital invested and gains, and the gains are liable to capital gains tax depending on the period of holding. Nonetheless, SWP option mutual funds provide good tax treatment compared to traditional income sources.

Is SWP a good option for me?

SWP can be a good option for investors who need constant income and flexibility. It can be for retirees or anyone who requires a regular payment without the need to redeem the entire corpus. Most of the mutual funds with SWP option can offer constant returns and aid in the management of liquidity.

What is the rate of return from a SWP?

SWP returns are determined by the nature of the fund, the performance of the market and the frequency of withdrawal. A SWP return calculator can be used to estimate possible earnings and will also help to determine the duration over which your corpus can last, as well as give you an idea of the future growth.

Systematic Withdrawal Plan - Meaning, Features, & Taxation

Just like one can systematically invest in mutual fund plans, they can also set up a systematic withdrawal plan to receive regular income from their investment every month on a fixed date. It can be a fixed or a variable amount. It is typically used for retirement and allows investors to withdraw monthly, semi-annually, quarterly, or annually.

Key Takeaways

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 amount for resident investors.

Systematic Withdrawal Plan Meaning (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 a 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 ₹1,00,000 in a mutual fund for one year and decided to withdraw ₹5000 per month. So every month, your investment amount will get reduced by ₹5000 and paid to you. The remaining amount after each month will continue to generate returns from the investment.

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 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.

Month	NAV (₹)	Withdrawal (₹)	Units Redeemed	Units Remaining	Explanation
1st Month	10	5,000	500	9,500	To withdraw ₹5,000 at ₹10 NAV, 500 units are redeemed. The remaining 9,500 units continue to earn returns.
2nd Month	25	5,000	200	9,300	As NAV rises to ₹25, only 200 units are redeemed to withdraw ₹5,000. Your total units now reduce to 9,300.

With each withdrawal, the number of invested units decreases, which affects your final returns over time. The total investment value depends on market performance and the frequency of withdrawals.

Also, learn What is NAV here.

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

Flexibility: SWP allows investors to select the amount, date, and frequency to receive income from an SWP. Also, one can stop it at any time.

Regular income: SWP lets mutual fund 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.

Capital appreciation: The regular withdrawal is less than the returns earned from the investment. Hence, the investors get some capital appreciation in the long run.

No TDS: There is no TDS deducted on SWP for resident investors.

How to Do an SWP?

Systematic Withdrawal Plan (SWP) is a method that enables an investor to withdraw a specified sum from their investments in a mutual fund at a planned frequency, offering the reliability of a constant flow of income. In case you would like to invest in SWP, you can do it in the following way:

Select a Mutual Fund Scheme:

Select the best SWP mutual fund that fits your financial objective and risk. Ensure that the fund has SWP facilities.

Initial Investment:

Invest in SWP by depositing a lump sum in the mutual fund that you have chosen. This will become the basis of future withdrawals and earnings.

Place an SWP Request:

Fill in the SWP form that the fund house gives. Indicate the amount and frequency of withdrawal (monthly, quarterly, etc.), start date and bank account particulars.

Know Tax Implications:

Essentially, every withdrawal will come with a tax implication based on the type of fund and the length of investment.

Follow Up Your Investment

Check the performance and the amount in the funds periodically to verify that it works as per your income requirements.

Formula to Calculate Systematic Withdrawal Plan (SWP) Returns

Your monthly withdrawal amount is decided based on a formula, which is also used in most systematic withdrawal plan calculators in India. The formula to calculate your SWP returns manually is:

A = PMT × ((1 + r/n)ⁿᵗ - 1) / (r/n)

Where:

A = Final investment value

PMT = amount withdrawn at every period.

r = Expected rate of return (in decimals)

n = Compounding frequency

t = length of investment (in years)

For example, if you invest ₹5,00,000 for 5 years with a monthly withdrawal of ₹8,000 and an expected annual return of 12%, your total withdrawals would be ₹4,80,000, and your final value would be ₹2,38,441.

You can use a systematic withdrawal plan calculator to estimate your potential returns accurately. Since it is an automated tool, you get quick and accurate results with minimal information. This also facilitates quick comparison to choose the best plan for your needs.

Benefits of Opting for a Systematic Withdrawal Plan (SWP)

You get to enjoy a plethora of different advantages by opting for a systematic withdrawal plan. Here’s a quick overview of some of the key benefits.

Regular Income

Systematic withdrawal plans provide you with a regular stream of income, which can be especially useful if you’re looking to supplement your regular income. It can also be useful for retired individuals seeking a steady income source to cover their living expenses.

Disciplined Withdrawal Approach

Systematic withdrawal plans encourage you to adopt a disciplined approach to managing fund withdrawals. For example, you may want to withdraw large sums, if not your entire investment, during bearish market phases due to the panic they create. These withdrawal plans can prevent you from making such impulsive decisions based on short-term market fluctuations.

Tax Efficiency

According to the Income Tax Act of 1961, long-term capital gains exceeding ₹1.25 lakh in a financial year are taxed at the rate of 12.5%. If it is a debt fund, the tax rate is based on your income tax slab rate.

However, if the long-term capital gains don’t exceed the limit in a financial year, you don’t have to pay any tax. With the help of a systematic withdrawal plan, you can set up the withdrawals in such a manner that you don’t cross the long-term capital gain threshold of ₹1.25 lakh in a financial year. This will allow you to avoid tax on your gains within the legal framework.

Rupee-Cost Averaging

Systematic withdrawal plans let you enjoy the benefit of rupee-cost averaging. When the markets are in a bullish phase, SWPs redeem fewer units. On the contrary, when the markets are falling, the withdrawal plans redeem more units. Such strategic withdrawals average your returns and protect you from losses you may face by redeeming at the wrong time.

Effective Uses of SWP in Mutual Funds

An SWP in mutual fund provides you with a number of effective methods for your investments and produces regular income:

Pension support: An SWP in mutual fund can be used to substitute or add to your retirement pension because periodic withdrawals preserve your standard of living by ensuring you have a stable and regular income stream.

Extra source of income: It can be an additional source of income during your working years, and this allows you not to have a hard time meeting your payments or even covering your debts.

Capital safety: With a SWP calculator in mutual fund, you plan how to withdraw the money and retain your invested capital by switching to some more stable options like debt or an arbitrary fund.

How to Effectively Plan Your SWP?

The best way to optimise your Systematic Withdrawal Plan (SWP) is to invest in stable investments like low-duration debt funds. These investments provide a stable growth with a low rate of risk, which provides a stable income.

For example, given an investment of ₹1 crore in a debt fund with an annual rate of 6 per cent and savings of ₹60,000 per month, your corpus would last almost 20 years. In order to have it running past 20 years, we can reduce the monthly withdrawal to ₹55,000. However, you also need to consider taxation, inflation, and fund performance to ensure that your withdrawal plan matches your goals.

How SWP and the 4% Rule Can Ensure a Comfortable Retirement?

Estimating your retirement corpus: Predict your savings amount.

Determine your annual withdrawal: Multiply your retirement corpus by 4% to find your yearly withdrawal. For instance, with ₹1 crore, you can withdraw ₹4 lakh annually.

Adjust for Inflation: Raise withdrawals annually (e.g., ₹4,24,000 with 6% inflation).

Note: This rule is a guide; adjust withdrawals based on market and personal needs. You can also use a SWP calculator for the same.

Here is an example of how the 4% rule is applied in SWP for 5 years where the initial investment is ₹1 crore, the rate of return is 8%, and the inflation rate is 6%:

5-Year Step-Up SWP Table

Year	Start Balance (A)	Annual Return (8%) (B)	Inflation-Adjusted Withdrawal (C)	End Balance (A + B - C)
1	₹1,00,00,000	₹8,00,000	₹4,00,000	₹1,04,00,000
2	₹1,04,00,000	₹8,32,000	₹4,24,000 (+6%)	₹1,08,08,000
3	₹1,08,08,000	₹8,64,640	₹4,49,440 (+6%)	₹1,12,23,200
4	₹1,12,23,200	₹8,97,856	₹4,76,406 (+6%)	₹1,16,44,650
5	₹1,16,44,650	₹9,31,572	₹5,04,990 (+6%)	₹1,20,71,232

Disclaimer: The above is just an example and actual values will vary depending on market and investment terms.

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 who 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. However, it’s important to remember that long-term capital gains from the equity funds are taxed 12.5% when the amount exceeds ₹1.25 lakh, and debt funds are taxed as per the slab rates.

Why is SWP a Good Investment?

As an investor, you may know that market fluctuations can directly impact your returns from mutual fund investments. Meaning, it affects the NAV and lowers the value of the asset if not withdrawn on time. An SWP can help protect the value of your investment, especially when the market is choppy, with regular withdrawals.
Moreover, 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. 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 the amount you need and the balance amount remains invested to earn returns.

Taxation of SWP Mutual Funds

Taxation of any capital gains would be according to fund type and holding period when you redeem mutual funds by use of a Systematic Withdrawal Plan (SWP). The profits are categorised as either the Short-Term Capital Gains (STCG) or Long-Term Capital Gains (LTCG).

Type of Mutual Fund	Holding Period	Tax Type	Taxation
SWP investment in equity funds/aggressive hybrid (>65% equity)	Held <12 months Held >12 months	Short-term capital gain Long-term capital gain	STCG 20% LTCG 12.5% (if the amount exceeds ₹1.25 lakhs)
SWP investment in Debt funds/conservative hybrid (<35% equity)	Holding period has no effect on tax rate	Capital gain	All gains are taxed at the investor’s income tax slab, or 20% with indexation if units are purchased before 1st April 2023.
SWP investment in Other hybrid (35–65% equity)	Depends on equity exposure	Varies	If >65%, it is considered equity fund and taxed accordingly If <65%, it is considered debt fund and taxed accordingly

Advantages of a Systematic Withdrawal Plan

SWP in mutual fund can make sense in case you are thinking of how to generate regular income out of your investments. It provides a reliable income, discipline in investment, and gives it flexibility to be used in different market conditions.

Suitable in a bull market: When the market is on the bullish side, the SWP in a mutual fund would enable you to enjoy the positive price activities in the market, and you will only redeem part of the value of your assets. The other units are still invested and generating returns from the market movements.

Fosters financial discipline: An SWP in mutual fund encourages you to manage money better by encouraging proper budgeting and avoiding expenditure outbursts with regular withdrawals.

Gives predictable income: The constant stream of income that comes with an SWP is perfect with the retirees or individuals on a regular income, and the rest of the corpus grows according to market returns.

The Bottom Line

Understanding your options in selecting an SWP can take time. Therefore, we suggest you evaluate all your options before investing. Consider the tax implication, inflation rate, your fund’s performance, your goals, and other factors to choose best plan possible.

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