SWP in Mutual Funds: Meaning and How It Works Online

Imagine you've been investing in mutual funds for a long time, and now you want to start withdrawing your money, but only a small portion of your investment each month. Fortunately, that option is already available to you. It's called a Systematic Withdrawal Plan, or SWP for short. In this blog, we’ll understand SWP in detail.

What is an SWP?

A systematic withdrawal plan, or SWP, is an option that allows investors to withdraw a fixed amount of money from a mutual fund at regular intervals. Just like a SIP (Systematic Investment Plan) lets you invest a fixed amount at regular intervals, an SWP (Systematic Withdrawal Plan) allows you to withdraw a fixed amount systematically at regular intervals.

With SWP, you can choose the withdrawal amount and frequency (monthly, quarterly, or annually). SWP is a simple yet smart strategy. On a fixed date, approximate units from your portfolio are sold, and the fixed funds get transferred to your account while your remaining investment continues to grow. 

SWP calculator

We have created a simple and easy-to-use SWP calculator where you just need to enter your lump sum investment, withdrawal period, withdrawal amount, and expected return. That's it, our systematic withdrawal plan calculator will calculate the total withdrawal during the period and the final maturity value at the end of the tenure. You can use the SWP calculator by clicking here.

Key Benefits of SWP

Here are some of the key benefits of withdrawing money using the SWP: 

Regular income stream

SWP can provide you regular stream of income. With SWP, you can select an amount and frequency, and at a specific date, a fixed amount will be credited to your account regularly. 

Rupee cost averaging 

Rupee cost averaging refers to the concept where you are selling more units when the market is down and fewer when the market is up. In this way, your selling price is averaging over time, meaning you are not selling at very low, nor very high, on average.

Capital appreciation

Under SWP, you don’t sell your whole investment at once but rather some units every month. In this way, the remaining portion of your mutual fund keeps on compounding. 

Tax benefits of SWP

There is no TDS deducted on the withdrawal, however, you have to pay the capital gain tax as per the income tax rules and regulations. 

Flexibility and customization 

A systematic investment plan allows you the flexibility to choose the withdrawal amount and frequency. If circumstances change, you can even customize it on a later date, such that increase or decrease the amount or the frequency. You even have the option of stopping or pausing your SWP.

How Does Systematic Withdrawal Plan Work Online?

Here's an example to understand the benefits & functioning of SWP better!

Let’s assume you have already invested ₹50,00,000 in a mutual fund. Some time has passed, and your portfolio has increased to ₹60,00,000 as of 1 January 2025. Currently, the NAV (Net Asset Value) is ₹50. This means you own 1,20,000 units (60 Lakh/50) of this mutual fund. 

So, you set up an SWP to withdraw ₹50000 every month. Let’s say your remaining investment grows by 12% annually. Let’s see your balance at the end of the year.

Calculation is pretty simple; every month, a certain number of mutual fund units are redeemed based on the value of the NAV. In months where NAV is higher, more units are being redeemed as compared to months in which NAV is lower. This phenomena lead to rupee cost averaging.

At the end of the year, this is how your mutual fund investments look:

• Balance Units: 1,20,000-11,350.59 = 1,08,649.41
• Final Amount in December: 1,08,649.41*56  = ₹ 60,84,366

The above table shows that despite you withdrawing ₹ 6,00,000 in the entire year, your investment managed to grow to ₹60,84,366. That is the power of SWP.

How to set up SWP

Step 1: Selecting the Mutual Fund

From your mutual fund portfolio, select the mutual fund for SWP. If you have different mutual fund investments in your portfolio, you would have to set different SWPs for each fund.  

Step 2: Setting up SWP

After selecting a Mutual fund, click on the options and then select the SWP. A new window will appear, here fill in the necessary details like withdrawal amount, frequency, and the exact date of a specific period. 

Step 3: Availing Regular Withdrawals:

After you are done with the setup, you will start receiving the specified amount on the specific date at regular intervals as selected by you. 

Who should opt for SWP?

1. If you are retired: If you are retired and looking for a constant flow of income into your account, then SWP is a very good option for you. SWP can be a good retirement planning tool. You can use our SWP calculator for detailed analysis.

2. If you have a lump sum amount: If you have a lump sum amount and you want to invest and at the same time want fixed monthly or quarterly income, you can opt for SWP, where you will get a fixed monthly payout while the rest of the investment keeps compounding.

3. If you need regular income: If you already have a good mutual fund portfolio and now just need some regular income, maybe for children's education, for vacation every quarter then you can select SWP and customize it according to your needs. 

4. If you are risk-averse: SWP also works efficiently for people who are risk-averse and do not want to hold on to their investment and wait for the ‘perfect time’. Instead, they want to earn a small amount from it periodically.

How is SWP Taxed?

The tax charges on SWP will be the same as for any other mutual fund. However, the tax treatment might differ a little. It is based on when you sell your mutual fund.

So, LTCG or Long-term Capital Gain is charged when investments are redeemed after 1 year. STCG or Short-term Capital Gain is charged when you sell your investments within 1 year. STCG is charged at 20% of the capital gain, while LTCG enjoys an exemption of 1,25,000, and it is then taxed at 12.5%. 

Now, say you withdraw ₹10,000 every month. 10,000 is not your gain. Your gain would be the difference in NAV when you withdraw and when you invested. Depending on when you are withdrawing, tax will be charged on the difference in NAV. This is how SWP’s tax treatment is different. Tax will be calculated depending on your periodic withdrawals.

Conclusion

SWP is one of the best options for those who want to withdraw their fund systematically. SWP is a smart withdrawal of funds, which provides you with constant income, a low tax burden, and capital appreciation in your remaining fund. SWP can also be a great retirement option, so one should consider this in their retirement planning.

Frequently Asked Questions (FAQs)