What is Systematic withdrawal plan?

What is Systematic withdrawal plan?

Last updated: 22 Nov, 2021 | 06:45 pm

SWP Mutual Fund: What is Systematic Withdrawal Plan & Features | INDMoney

SWP stands for Systematic Withdrawal Plan, which allows investors to withdraw the amount from the mutual fund every month on specified dates. The amount of withdrawal can either be variable or fixed based on the investor. The withdrawals can be made on a monthly, quarterly, semi-annual, or annual basis as per the requirements and preferences of the investors. 

What is SWP? 

A Systematic Withdrawal Plan is a plan that allows investors to redeem their investment every month, quarterly, or annually from their mutual fund scheme on predefined dates. It allows you to withdraw money in installments, unlike other lump-sum withdrawals. A systematic Withdrawal Plan is the opposite of a systematic investment plan. 

In SIP, you channel your savings from your bank account to the mutual fund scheme. Whereas on the other hand, in SWP you direct the investments to the savings bank account from the mutual fund scheme. Systematic withdrawal plans every month or quarter allows you to customize your cash flows as per your preferences and requirements. Investors have an option to withdraw a fixed amount of capital gains from their investment in a mutual fund scheme. You can use that money to reinvest or use it in the form of cash as it is. 

Why is the SWP (Systematic Withdrawal Plan) needed? 

Mutual investments are directly impacted by market fluctuations. The changes can affect the NAV adversely, especially when the date of returns is near. The market is uncertain, and usually, the mutual funds' investments change according to the market situations and fluctuations. SWP allows you to withdraw money whenever you are in financial need. So, if you want to invest your funds in a phased manner, SWP is a good option. It will ensure you with the availability of the funds when you need money or have a financial need. 

An SWP is also a great way to have a second source of income, with an exception to your monthly income. It gives you a regular flow of income each month, quarter, or year as per your requirements and withdrawal process. This is a great investment strategy if you want to have an extra income source. 

How does an SWP work? 

When you as an investor choose an SWP (Systematic Withdrawal Plan), it also affects the mutual fund account. It is essential to keep in mind that SWP is not similar to opening an FD account where you generally receive the monthly interests. With FD, your corpus value is not affected whenever you withdraw the amount of interest. On the other hand, SWP in mutual funds schemes and the fund value is reduced by the units’ numbers as and when you withdraw the amount. 

Why is the Systematic Withdrawal Plan (SWP) a good investment option? 

A Systematic Withdrawal Plan is a good investment option in general for individuals. Firstly, the withdrawals that you make in SWP are not subject to TDS (tax deductions at source). Whereas on the other hand, all the capital gains are taxed whenever you withdraw the money. In some cases, you customize your mutual fund's scheme in a way that you only withdraw the gains made on that investment. It allows you to enjoy the gains at a regular interval and keep your capital investment at the same time. 

Benefits of SWP (Systematic Withdrawal Plan): 

The benefits of the Systematic Withdrawal Plan are as follows: 

  • Flexibility

SWP gives you flexibility in mutual funds to choose the amount, date, and frequency of the financial needs. Investors have the option to stop the mutual fund investment at any time, or you can also further invest more money in the fund. You can withdraw any amount of investment at any time as per your financial needs, requirements, and preferences. 

  • Regular income

SWP acts as a passive regular income for the investors. It is the second source of income. So, SWP is perfect for individuals who need a regular cash flow to meet the regular expenses of their daily life. It gives you an added advantage to use the cash to cover your financial needs. 

  • Capital appreciation 

The SWP withdrawal rate is generally lower than the return of the funds. It also allows you to get capital appreciation in the long term. 

  • No TDS 

The best part of the SWP is that there is no TDS (tax deduction at source), unlike capital gains. 

Who can use SWP (Systematic Withdrawal Plan):

The people who can use SWP are listed as follows: 

People looking for capital protection

If you are risk-averse, then investing in an SWP mutual funds scheme is the best option as it has moderate to low-risk features for the investors. It is not a high-risk investment. Let us assume that the investment made by you initially is in the arbitrage fund and the capital appreciation received on the investment is by the SWP. So, initial investment almost remains at zero risk, which is a huge advantage. 

Source of Income

It acts as a regular source of income for the investors. It can be your second income source that helps you whenever you are in a financial crisis. It can also help you cover your living costs and expenses. Investing in a mutual funds scheme for the long run and withdrawing the monthly amount as SWP is a great regular source of income. 

Wanting to create pension of their own 

SWP is also perfect for the investors wanting to create pensions of their own by making investments in the corpus mutual funds scheme as per their risk preferences. It allows them to earn a regular income that can be used for creating their own pension. 

People who are in the high tax bracket 

People who fall under the bracket of high taxes find SWP useful as there is no tax deduction at source on the capital gains. Whereas capital gain from the equity-oriented funds is moderately taxed. 

Tax efficiency through SWP: 

When you withdraw or redeem your investments as SWP amount, it attracts the capital gains on the profits of initial investments. The capital gains can either be short term or long term, according to the following conditions:

Equity oriented Funds

If any mutual fund investment is redeemed within 12 months of time from the date of investment, those investments are treated as short-term gain and are taxed at 15%. However, the gains made after that point of time are considered long-term gains and are tax-free up to INR 1 lakhs in a financial year. The gains over INR 1 lakhs are taxed at 10%. 

Non-Equity Funds 

If non-equity funds are redeemed within 36 months of time from the date of investment, those gains are incorporated into the investor's income and are taxed at the rate applicable to the investor. In this, gains made after 3 years are long-term gains and are taxed at 20% after giving the indexation benefits. 

Unlike other traditional savings, such as investments in FDs and postal investments, the mutual fund's scheme has no TDS on the capital gains for the individual investors. Other than TDS, the interest income of the FDs and the other small saving schemes are taxes according to the income tax rate of the investor's investment. Systematic Withdrawal Plans in mutual funds schemes are better than mutual funds dividends. It is because the AMC deducts tax deduction at source at 10% on the dividend. Also, the dividends received to the investors are taxable at hand. 

To conclude, we can say that if investors can analyze the SWS (Systematic Withdrawal Plans) in mutual funds schemes, they will know that it is one of the best strategies to have a regular source of income. It acts as a second source of income. It provides you with a sense of regularity in cash flows. It gives you a regular flow of income each month, quarter, or year as per your requirements and withdrawal process. This is a great investment strategy if you want to have an extra income source.