Systematic Withdrawal Plan (SWP)

What is a Systematic Withdrawal Plan?

A Systematic Withdrawal Plan (SWP) is a facility that lets you redeem or withdraw your funds from a mutual fund scheme in a planned and phased manner. A lump sum withdrawal can trigger high taxation. Additionally, you may not have a use for lump sum funds. A Systematic Withdrawal Plan allows you to break down your distributions into installments. This lowers your tax liabilities, enables better money management, and keeps a part of your money still invested in the mutual fund scheme. 

You can customize your SWP plan in mutual fund schemes according to your needs and financial goals. You can set the frequency and amount, as well as opt for the withdrawal of only capital gains. Further, the amount you withdraw through a Systematic Withdrawal Plan can be used for your expenses or reinvested into another investment option. This is a common way for investors to explore other market opportunities.

How Does a Systematic Withdrawal Plan Work?

To get a clear understanding of the Systematic Withdrawal Plan meaning, you must understand how it works. Here’s an example that can help:

Suppose the value of your investment in a mutual fund scheme equals Rs 1.5 crore, and you need a regular income of Rs 50,000 per month after retirement. In this case, you can set up an SWP with the asset management company. Every month, a sum of Rs 50,000 will be transferred to your bank account, and you will be able to use the money for your monthly expenses. 

However, the value of the SWP is determined by the units in your mutual fund scheme and the scheme’s prevailing Net Asset Value (NAV). For instance, in the above example, if the NAV is Rs 10, and you withdraw Rs 50,000 per month, you will sell 5,000 units of the fund to redeem the required value. Now, if the NAV increases to Rs 20, you will sell 2,500 units of the fund to redeem the required value. Mutual fund redemptions are unlike withdrawing funds from a bank account or a deposit. The value of the NAV will determine the number of units you have left in your fund after every withdrawal. 

The number of units in your scheme will keep reducing with every SWP until it is left with no more units, and you have redeemed all your money. The higher the NAV, the lower the redeemed units, and vice versa. Therefore, it is vital to have the best SWP mutual fund plan for your withdrawals and take a look at the market and the fund’s NAV while deciding your redemptions. Unplanned withdrawals can impact your overall return and the fate of your future earnings. 

Benefits of a Systematic Withdrawal Plan (SWP)

A Systematic Withdrawal Plan (SWP) offers mutual fund investors a reliable way to generate regular income while keeping their investments active. Here are the key benefits of SWP.
 

• Regular income - SWP allows you to withdraw a fixed amount at regular intervals, providing a predictable cash flow. This feature is especially useful for retirees or those seeking additional income without fully liquidating their investments.
  
  
• Tax benefits - No TDS is applied to withdrawals through SWP, making it a tax-efficient option for investors.
  
  
• Customisation and flexibility - Investors have full control over the frequency and amount of withdrawals. You can adjust or stop the plan anytime to suit your financial needs.
  
  
• Compounding advantage - The remaining corpus continues to grow through compounding, maximising your returns over time.
  
  
• Volatility management - By spreading out withdrawals, SWP helps mitigate the impact of market fluctuations, providing a buffer against volatility.
  
  
• Investment discipline - Much like an SIP encourages disciplined investing, SWP promotes a systematic approach to withdrawals, preventing panic decisions during market downturns.

SWP can be a smart solution for those looking to balance income and investment growth.

Why Do I Need a Systematic Withdrawal Plan?

A Systematic Withdrawal Plan can be used for various purposes. You can use it to withdraw your funds when you have a financial need, such as a planned goal like retirement, a child’s education or marriage, a home purchase, and other similar purposes. 

Other than this, SWP in mutual fund schemes also allows you to secure your investments from market fluctuations. If you are approaching your goal and the market takes a downturn, your returns can be impacted at a time when you need instant money. In such a case, withdrawing your money can be important. If not, your earned profits can be lost to market volatility. A Systematic Withdrawal Plan allows you to use your money when the need arises and, at the same time, protects it from excessive tax. 

Lastly, an SWP plan can also be used as a second source of income along with job or business income. SWP offers a regular flow of income that can be used for basic needs apart from your planned goals as well. 

Why Is the Systematic Withdrawal Plan a Good Investment Option?

A Systematic Withdrawal Plan is not subject to Tax Deductions at Source (TDS), which helps in lowering your overall tax output. Further, you can choose only to withdraw your capital gains and let your principal capital stay invested in the mutual fund scheme to garner more returns. This offers the dual benefits of a regular income and continued investment for further gains. So you can remain invested and target your future financial goals. 

Tax Implications of Systematic Withdrawal Plans

SWP taxation is a critical aspect to keep in mind when planning your withdrawals. All withdrawals from mutual funds are taxed as short- and long-term capital gains. The tax rate differs for debt and equity mutual funds. Here’s how this is done:

Equity mutual funds: 
 

• Mutual funds held for a year or more are taxed as long-term capital gains at 10% on profits exceeding Rs 1 lakh

• Mutual funds held for less than a year are taxed as short-term capital gains at 15%
   

Debt mutual funds: 
 

• Mutual funds held for three years or more are taxed as long-term capital gains at 20% with indexation

• Mutual funds held for less than three years or more are taxed as short-term capital gains at the prevailing income tax slabs
  
  

The best Systematic Withdrawal Plan can be created after carefully understanding the impact of these tax laws on your money.