What Is SWP (Systematic Withdrawal Plan)?
Every individual has different financial needs. Hence, every investor has a unique investment plan. While some investors prefer investing in a lump sum, some others like to stagger their investments and use a systematic investment plan (SIP). While some investors seek capital growth, some others want regular income from their investments. There are many tools and facilities extended by fund houses to meet the expectations of different types of investors. One such facility is a Systematic Withdrawal Plan (SWP). A Systematic Withdrawal Plan or SWP is a facility extended to investors allowing them to withdraw a fixed amount from a mutual fund scheme regularly. You can choose the amount and frequency of withdrawal, and you can also choose to just withdraw the gains on your investment keeping your invested capital intact.
Key Features of SWP
Regular Redemption
It is a facility to redeem units regularly from your mutual fund portfolio at predetermined intervals.
Flexible Frequency
You can choose the frequency of withdrawals - monthly, quarterly, or as per your convenience.
Withdrawal Options
You can either withdraw a fixed amount or only the capital appreciation, keeping your principal intact.
Regular Income
It is ideal for investors seeking regular income from their investments without liquidating entire holdings.
Benefits of Systematic Withdrawal Plan (SWP)
Tax Benefits
As an investor, if you desire regular income from your investments, you can either opt for the Dividend option or an SWP. When fund houses distribute dividends, they deduct Dividend Distribution Tax (DDT) at 10% at source. With SWP, there is no tax deducted at source, but capital gains tax applies based on scheme type and withdrawal amount.
Rupee Cost Averaging
When you opt for an SWP, a certain number of units are redeemed regularly. During high markets, fewer units are redeemed for a fixed amount, while during low markets, more units are redeemed. This averages your returns and protects you from potential losses that could arise if you sell all units during a bear market.
Ideal in Bull Run
While most investments offer great returns in a bull run, if you have opted for an SWP and your annual withdrawal amount is lesser than the returns generated by the scheme, then your investment will last much longer. Also, by withdrawing the gains offered by the bullish phase, you can pocket the profits while maintaining your investment.
Investment Discipline
Like a SIP helps you learn the disciplined approach to investing, an SWP helps you steer clear of withdrawing large amounts due to panic if the markets correct themselves. It creates a systematic approach to withdrawals, ensuring you don't make emotional decisions during market volatility.
Capital Gains Tax on SWP
| Fund Type | Holding Period | Tax Rate | Notes |
|---|---|---|---|
| Equity Funds | Less than 1 year | 15% | Short-term capital gains tax |
| Equity Funds | 1 year or more | 10% (above ₹1 lakh) | Long-term capital gains, first ₹1 lakh tax-free |
| Debt Funds | Less than 3 years | As per tax slab | Short-term capital gains, added to income |
| Debt Funds | 3 years or more | 20% after Indexation | Long-term capital gains with indexation benefit |
Effective Uses of SWP
Secondary Income
In today's times, an additional source of income is needed to tide over the rising cost of living. Investing in Mutual Funds and withdrawing via an SWP is a great way to create a regular source of secondary income without liquidating your entire investment.
Create Your Own Pension
Regardless of whether you have a pension plan or not, you can create a corpus around 5 years before retirement and invest it in a mutual fund scheme according to your risk tolerance. Once you retire, you can start an SWP and create your own pension.
Protect Your Capital
If you are highly averse to taking risks, you can initially invest in Arbitrage Mutual Fund Schemes which offer assured returns with near-zero risk. You can opt for the dividend option and invest the dividend in a debt scheme using a SIP. Eventually, you can start an SWP and earn regular income without risking your capital.
Final Thoughts
As you can see, a Systematic Withdrawal Plan is a good tool to have in your toolbox. Whether you are a newbie or an experienced investor, an SWP can be used effectively to achieve your financial goals. It offers tax benefits, rupee cost averaging, and helps maintain investment discipline. Keep this tool in mind while creating your financial plan, especially if you need regular income from your investments. SWP allows you to withdraw systematically while keeping your investment growing, making it an ideal solution for retirement planning and creating secondary income sources.