Hello Readers!

We are already aware of SIP (Systematic Investment Plan), a systematic investment method, in mutual funds. Through one of our blogs, Systematic Investment Plan Simplified, we also explained to you about the concepts of SIP. Well, SIP is a kind of regular and systematic investment, and via this blog we want you to make aware of one more term used widely in the world of mutual fund investment, that is SWP. SWP is a systematic withdrawal plan, which allows an investor to withdraw or redeem funds from his mutual fund scheme every month on an already set date.   

Through this blog, we are going to discuss SWP (Systematic Withdrawal Plan), its features, its benefits and more.

WHAT IS SYSTEMATIC WITHDRAWAL PLAN? 

A Systematic Withdrawal Plan (SWP), is a kind of redemption facility, that allows its investors, to withdraw a fixed amount from your mutual fund at regular periodic intervals, the periodic intervals can be either monthly, quarterly or yearly, as per the investors choice and requirements. SWP withdrawals are somewhat different from Lump-sum withdrawals.

SWP is also considered opposite to SIP. In SIP, you connect your saving account to your mutual fund schemes, so that you can pay your investment installments, systematically and regularly. On the other hand, in SWP also, you connect your savings account to the mutual fund scheme, but to receive your investment amount or redemption amount. It is one of the strategies to deal with market fluctuations.

Investors can either choose to withdraw the capital appreciated on their investment or they can choose a fixed amount they wish to gain every month, or per year. When the investor chooses to withdraw only the appreciated amount, in that case, investors will not only have their money still invested in the scheme, but they will also be able to receive regular income and returns.

WHY THERE IS A NEED OF SYSTEMATIC WITHDRAWAL PLAN? 

SWP is generally advised to investors so that they can hinder the effects of market fluctuations that may impact the fund NAV adversely. With the help of SWP, investors can time their withdrawals as per their financial requirements. Like if investor's financial goal needs to get the funds in a phased manner, then they are advised to opt SWP, that ensures the investors, the required fund at the right time, basically, there won’t be any delay, to accomplish their goal, because of the money crisis.

SWP is mostly preferred by the investors, who wish to have an extra source of income, rather than their salary income. With SWP, investors can create a regular flow of income and add to their regular income.  

BENEFITS OF SYSTEMATIC WITHDRAWAL PLAN

Well, there are two important benefits of SWP, which make it an important investment strategy. Let’s have a look at these benefits:

  1. In SWP, you have an option, where you can choose to receive only the appreciated amount on your investment, in this way you didn’t do anything with your invested amount, which keeps your capital invested while at the same time, you enjoy the gains on a regular interval.
  2. The regular withdrawals made, also referred to as regular redemptions are free from tax deductions at source (TDS). However, the capital gains are taxed on the withdrawn amount.

HOW DOES A SYSTEMATIC WITHDRAWAL PLAN WORK?  

Before knowing about how SWP works, you need to note the point that SWP is not similar to opening an FD (Fixed deposit) in bank account, where you receive monthly interests as because in FD, the corpus value is not impacted when you withdraw the interest, whereas, in systematic withdrawal plan (SWP) in mutual fund schemes, the value of your fund is reduced by the number of units you withdraw.

Now let us understand the concept of SWP deductions through an example:

Suppose an investor has 8,000 units in an MF scheme. The investor gave the instructions to the fund house that he wants to withdraw Rs. 5,000 every month through SWP.

Assume on 1st January, the NAV of the scheme is Rs. 10. Then, an equivalent number of MF units will be = Rs. 5,000/Rs. 10 = 500, hence 500 units would be redeemed, and the investor would receive an amount of Rs. 5,000.

Now his remaining units in MF scheme will be = 8,000 - 500 = 7500 units.

On 1st February, the NAV is Rs. 15. Thus, the equivalent number of units will be = Rs. 5000/Rs. 15 = 333 units, hence 333 units would be redeemed from his MF holdings, and Rs. 5,000 would be given to him.

Now his remaining units = 7500 - 333 = 7167 units and the process continues till the time he wants the withdrawals.

TAXATION OF SYSTEMATIC WITHDRAWAL PLANS

Well, there is a trend or pattern of taxation in Systematic Withdrawal Plans (SWP). Let us understand this trend:

  1. In case any investor opts SWP in Debt funds, if his holding period will be less than 36 months, then the amount that he withdraws will form a part of his income and will be taxed according to his income slab, whereas if his holding period will be more than 36 months or three years, then the long-term capital gains will be taxed at 20% with the benefits of indexation.
  2. In case any investor opts SWP in equity funds, if his holding period will be less than one year, then the withdrawn amount will be taxed at the rate of 15%, whereas, if the holding period will be more than one year, then the long-term capital gains will be taxed at 10% without indexation.

As of now, you are aware of the concept of Systematic Withdrawal Plan and also you know about its benefits, so plan your redemption of mutual fund units through SWP, it will help you to cover your regular financial need along with the growth of invested amount!

Here I am listing some of the best SWP plans that you can opt for your investment:

  1. ICICI Prudential Equity & Debt Fund
  2. HDFC Balanced Advantage Fund
  3. ICICI Prudential Balanced Advantage Fund
  4. HDFC Equity Savings Fund
  5. ICICI Prudential Equity Savings Fund

Most importantly, always consult a financial planner or advisor, before choosing an SWP plan on your investments. They will help you select the best fund, for your SWP plan, as per your requirement.

You can also contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.


Happy Investing!


(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).