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What is SWP in Mutual Fund?

Withdrawing from a mutual fund scheme in phases is generally more practical and useful than taking out all your money at once. With systematic withdrawal plans, you can plan and withdraw only what’s necessary and according to your needs. A SWP in mutual funds allows you to redeem your investment from a mutual fund scheme in instalments. Systematic withdrawal plans give you the opportunity to create and customize cash flows as per your requirements. You can also choose whether just capital gains on investments should be withdrawn, or a fixed amount. 

Long Term Portfolio
Long Term Portfolio

The right mutual funds for your long-term goals with inflation-beating growth plus risk management.

Indicative returns of 10-12% annually

Indicative returns of 10-12% annually

Investment horizon of 5+ Years

Investment horizon of 5+ Years

No lock-in

No lock-in

Long term goals such as retirement or building your wealth

Long term goals such as retirement or building your wealth

SWP is a great plan to keep your money invested in mutual fund schemes while earning regular income and returns. You can also choose to reinvest the withdrawn money into other mutual funds or use it for other needs. If you reinvest the amount, you get the chance to diversify your investment portfolio.

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Benefits of Systematic Withdrawal Plan 

  • The following are the benefits of a Systematic Withdrawal Plan:
  • Flexibility: SWP offers investors the flexibility to choose their withdrawal frequency, date, and amount as per their needs. You can easily stop your SWPs, add more investments, or withdraw the entire amount as a lump sum. Thus, SWPs give you the flexibility to choose the most suitable option as per your financial needs. 
  • Regular Income: With SWP, you can get regular income from your mutual fund investment. The corpus amount is disbursed at a predetermined frequency. Thus, SWP options can be a good replacement for your salary during retirement days.
  • Capital Appreciation: While you withdraw some amount each month, the remaining capital will continue to generate returns. Thus, giving you an opportunity for capital appreciation on the remaining capital. 
  • No Tax Deducted At Source: Mutual fund houses do not deduct any TDS on SWP withdrawals for resident individuals. 

How Does SWP Work Differently as Compared to Other Options?

An SWP in mutual funds empowers you with greater flexibility. Regular FDs require you to wait until maturity for withdrawal and also do not allow you to use the interest amount. 

However, when you withdraw the interest amount upon maturity of your fixed deposit, it does not impact the corpus value. Whereas in the case of a systematic withdrawal plan, the fund value is reduced by the number of units withdrawn. You may even end up withdrawing your capital if the mutual fund scheme has not earned any dividends.

For example, if you have 10,000 mutual fund units and the scheme’s Net Asset Value (NAV) is Rs. 10. You opt to withdraw Rs. 5,000 each month through a systematic withdrawal plan. Withdrawing Rs. 5,000 from the scheme means 500 units of your mutual funds will be sold. 

You can understand the calculation by dividing Rs. 5,000 with the NAV of Rs. 10. The remaining MF units under the scheme will be 9,500 after each withdrawal. Now if next month the NAV of your scheme increases to Rs. 20, then 250 MF units will be sold. So now it will be calculated as Rs. 5,000 divided by the NAV of Rs. 20. You will now be left with 9,250 MF units post this withdrawal. So, with each withdrawal, you will notice a reduction in the number of mutual funds. 

You redeem fewer units upon SWP when the NAV of your mutual funds is high. Conversely, when the NAV falls, it leads to the redemption of more units. 

The above example shows why planning your SWP is essential to avoid the detrimental effect on the value of your fund.

Who Should Opt for a Systematic Withdrawal Plan or SWP in Mutual Fund?

An SWP in Mutual Funds is ideal for the following types of investors:

Regular Income Seekers

In a time when the cost of living is rising, most of us are looking for ways to make our money work harder. It is worth considering investing in schemes that will create an additional income stream. A well-planned SWP is ideal for you if you are an investor looking for regular secondary income. You can take advantage of the SWP in mutual funds by creating an additional income stream from long-term investments. 

Investing for Post-Retirement

A long-term mutual fund investment with a well-planned SWP can work as a pension, thereby generating regular earnings. You can choose to invest your retirement corpus in MF schemes that suit your risk profile. It will allow you to earn regular income at chosen frequencies. Upon retirement, you even have a choice to continue with the current investment plan or start an SWP. It gives you control over how much money will be available for spending each month after retirement.

Tax Implications of a Systematic Withdrawal Plan

Traditional investment instruments like fixed deposits attract TDS on interest. Whereas capital gains in mutual funds are not subject to TDS. Though, the AMC deducts TDS at 10% upon the declared dividend on your mutual fund investments. However, SWP is subject to taxes only when you redeem the MF units. The capital gains on the profits you make on the sale of MF units are either short-term or long-term. You can calculate the tax implication as per the following conditions:

Equity/ Equity-oriented Funds

If you redeem your funds within 12 months from the date of investment, you earn short-term gains. These gains are taxable at 15%. When redemption is done after 12 months from the date of investment, the profits are known as long-term gains. These are tax free up to Rs. 1 Lakh in a financial year. If your long-term capital gains are over Rs. 1 Lakh, they are taxed at 10%.

Non-Equity Funds

The units that you redeem within 36 months from the date of investment are eligible for short-term capital gains. You must add these gains to your income and the tax levied will be as per the rate applicable to you. Gains made upon redemption after 3 years from the date of investment are known as long-term capital gains. 20% tax is applicable to these gains after allowing indexation benefits.

Things to Consider Before Investing in Best SWP Mutual Fund in India 2023

Following are the things to keep in mind before investing in the best SWP mutual funds in India

  • Fund Performance: While picking a fund to invest, it is important to check the returns and past, performance of the fund. Though historical returns do not guarantee future returns, they are a good indicator of how the fund can fare during different periods. Thus, always check the fund’s performance and risk-adjusted returns. 
  • Fees: Next, look out for any fees or charges associated with investing in the fund. Some funds may have entry and exit loads. Some may have a high expense ratio. Thus, pick funds with low fees and charges, as it helps in maximizing returns. 
  • Financial Goals: Your financial goals play a significant role in picking an SWP mutual fund. For example, if you are looking for regular income or a pension during retirement, SWP is a suitable option to replace your monthly employment income. However, if you are investing to save for purchases like a car, house etc., then SWP may not be the most suitable option. Thus, your investment objective largely determines which fund is best for you. 
  • Tax Implications: Every SWP transaction attract capital gain tax. Depending on the fund’s type (equity or debt) and investment holding period (long-term or short-term), the capital gains are taxed. For instance, in you have opted for an equity mutual for your SWP, short-term gains (investment holding period less than one year)  are taxable at 15%. On the other hand, long-term capital gains above INR 1,00,000 (investment holding period greater than one year) are taxable at 10%.
  • Market Situation: Investing in the SWP plan implies that you are looking for a regular payout. When invested in a bull market, there is a high probability that you may generate positive returns. On the other hand, if you invest in a bear market, it may not yield desired returns. Thus, while investing in SWP, considering the market conditions is necessary.