What is SWP?

SWP - The Systematic Withdrawal Program - What it is & How it Works

Systematic Withdrawal Plan, or SWP, is the opposite to Systematic Investment Plan (SIP). The former requires you to invest a fixed amount in Mutual Funds at regular intervals. However, the former allows for withdrawals at a predetermined date. This can be either annually, half-yearly or quarterly.

Mutual Fund SWP (Simple Instalment Plan) is a way to redeem a lump sum Mutual Fund investment. SIP channels your savings into mutual funds, but SWP channels your investments into savings. This is one of many ways to manage volatility in the market.

The Systematic Withdrawal Plan allows you to customize your cash flow according to your needs. You can choose to withdraw only the capital gains or a fixed amount. Your money will remain invested in the scheme and you will receive regular income and returns. The withdrawn money can be reinvested or kept as a liquid asset (in bank, or as cash).

Why is it important to choose a Systematic Withdrawal Plan

Mutual Funds can be subject to market risk. This means that fluctuations in the market could adversely affect the Net Asset Val (NAV). If you do not withdraw your funds on time, it is possible that you could lose out on fund returns.

An SWP allows you to withdraw funds at any time, as per your financial needs. SWP is an excellent option if you have invested in mutual funds to reach your goals. This allows you to achieve your financial goals quickly and without any cash crunch.

SWP is a great way to earn extra income in addition to your regular salary. This is a great way for you to earn periodic incomes for planned expenses like travel and other necessities. You must create SWP so that you have cash at your fingertips whenever you most need it.

What are the advantages of SWP as an investment choice?

There are two key factors that make SWP an investment strategy that is wise.

These withdrawals, also known as redemptions, made through SWP do not have to be subject to Tax Deduction at the Source. The capital gains on the withdrawals are taxable.

You don't have to withdraw the amount you invested. You can withdraw the appreciation on your investment amount and continue to enjoy the gains.

How do you withdraw from SWP?

There are two options for withdrawal with SWP. You can withdraw either a fixed amount, or an appreciation amount.

Fixed withdrawals allow you to withdraw a fixed amount at regular intervals, such as monthly or quarterly.

You can only withdraw appreciation on a monthly or quarterly basis.

What is a Systematic Withdrawal plan?

The Systematic Withdrawal plan affects your Mutual Fund account by reducing the value of your mutual fund account by the number units that you withdraw.

SIP More units are bought when the market moves downward and less when it is rising upward. SWP is similar. In SWP, more units can be withdrawn when there is a lower Net Asset Value and fewer units when there is a higher NAV.

Let's say, for example, you have 5000 units in a Mutual Fund scheme. You want to withdraw Rs2000 each month through SWP in order to reach a goal.

If the scheme's NAV is Rs10, then Rs2000 withdrawals cannot be made unless 200 units are sold (withdrawal amount/NAV). The remaining balance in the Mutual Fund account will then be 4800 units (5000-2200). If the NAV rises to Rs20, the Rs2000 amount can be withdrawn by selling 100 units. The Mutual Fund balance will drop to 4700 units (4800-100) after this withdrawal.

Each withdrawal will result in a decrease in the Mutual Fund account's units. It is important to plan your SWP according to your goals and requirements. Unplanned SWPs can have a negative impact on the value and performance of your Mutual Fund.

What tax implications does SWP have?

SWP was created as an alternative to dividend plans. Dividends are subject to Dividend Distribution Tax. This tax is usually deducted at source from the dividend amount by the Asset Management Company and reduces the investor's in-hand return. However, SWP allows an investor to get regular income from equity funds and optimize the tax on long term capital gains (LTCG).

SWP provides tax benefits on capital gains over Rs 1 lakh. Only gains exceeding RsI lakh will be subject to tax by the investor.

You have invested Rs25 lakh into an equity mutual fund. After one year, you wish to withdraw 12% per month. Your withdrawal amount is Rs25,000 per month, or Rs35,000 in a single year.

If the rate of return is 12% per annum, investors would only pay 2% of short-term capital gains taxes. In the fourth or fifth year after the withdrawal, the LTCG tax liability will be due as the profit amount is greater than Rs1 lakh. The liability will amount to approximately 1% of the amount that is withdrawn, compared with receiving dividends at 11.65% effective rate.

Last words

You now know what SWP is and what its benefits are. It's time for you to begin receiving returns on your investment funds through SWP.