Systematic Withdrawal Plan (SWP) - Complete Guide
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 Systematic Withdrawal Plan
Regular Redemption
Facility to redeem units regularly from your mutual fund portfolio at predetermined intervals - monthly, quarterly, or as per your convenience.
Flexible Frequency
You can choose the frequency of withdrawals based on your income needs - monthly for regular expenses or quarterly for periodic needs.
Withdrawal Options
You can either withdraw a fixed amount or only the capital appreciation, keeping your principal investment intact for continued growth.
Regular Income
Ideal for investors seeking regular income from their investments without liquidating entire holdings, perfect for retirement planning.
Benefits of Systematic Withdrawal Plan
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, which can be more tax-efficient.
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 withdrawal 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 for future growth.
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 and maintain your investment for long-term growth.
Understanding Rupee Cost Averaging in SWP
Whether you purchase or redeem units in installments, you benefit from Rupee Cost Averaging. Since the markets are volatile, when you are redeeming all your units together, the timing of the sale needs to be when the markets are doing well. This ensures that you book good profits. If you end up selling during a slump, your profits can be impacted.
Example: SWP vs Lump Sum Withdrawal
Consider two investors who both invested ₹5 lakh in April 2019 at NAV of ₹500, getting 1000 units each:
| Month | NAV | SWP Amount | Units Redeemed | Units Left | Remaining Value |
|---|---|---|---|---|---|
| April | 500 | - | - | 1000 | ₹5,00,000 |
| May | 515 | ₹50,000 | 97 | 903 | ₹4,65,045 |
| June | 510 | ₹50,000 | 98 | 805 | ₹4,10,550 |
| July | 525 | ₹50,000 | 95 | 710 | ₹3,72,750 |
| August | 530 | ₹50,000 | 94 | 616 | ₹3,26,480 |
| September | 498 | ₹50,000 | 100 | 516 | ₹2,56,968 |
In September, if Rajeev withdraws ₹2.5 lakh at NAV 498, he redeems 502 units and has 498 units left worth ₹2,48,004. However, Rajesh with SWP has 516 units worth ₹2,56,968 - benefiting from rupee cost averaging by redeeming fewer units during high markets and more during low markets.
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 Systematic Withdrawal Plan
Secondary Income Source
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, providing financial stability and flexibility.
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, ensuring regular income during retirement years while keeping your investment growing.
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, providing peace of mind along with returns.
How to Start an SWP
Step 1: Have Existing Investment
You need to have an existing mutual fund investment in the scheme from which you want to withdraw. SWP works on your existing holdings, so ensure you have sufficient units to support regular withdrawals.
Step 2: Choose Withdrawal Details
Contact your fund house or broker and choose the withdrawal amount and frequency (monthly, quarterly, etc.). Decide whether to withdraw a fixed amount or only the capital appreciation, keeping your principal intact.
Step 3: Set Start Date
Set the start date for your SWP. You can choose any date that suits your income needs. The fund house will automatically redeem units and transfer funds to your linked bank account on the scheduled dates.
Step 4: Link Bank Account
Ensure your bank account is linked to your mutual fund folio. The SWP will automatically transfer the withdrawal amount to your bank account on each scheduled date, providing seamless access to your funds.
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 compared to dividend option, rupee cost averaging when redeeming units, and helps maintain investment discipline. SWP is particularly beneficial during bull markets when your annual withdrawal amount is less than the returns generated, making your investment last longer. 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, creating secondary income sources, and managing your finances in a disciplined manner.