SWP (Systematic Withdrawal Plan) allows you to withdraw a fixed amount from your mutual fund investment at regular intervals while your remaining investment continues to grow. Learn how SWP works, its types, tax implications, and how to plan it effectively. Calculate your returns with the SWP calculator and plan your SWP returns with it.
What Is SWP?
SWP, also known as Systematic Withdrawal Plan, is an investing strategy under which you withdraw a fixed amount from your mutual fund investment at regular intervals. This is a popular scheme that lets investors create a plan to systematically “withdraw” a certain percentage from their lump sum investment without compromising its returns.
Let’s understand this with an example. Say you invested ₹10,00,000 at the beginning of the year. You set up an SWP that would credit ₹10,000 to your bank account every month. So, every month your investment will reduce by ₹10,000, and the mutual fund units proportional to the withdrawal amount and the ongoing NAV will get deducted.
What are the types of SWP?
There are 2 types of SWP strategies:
Fixed Withdrawal on SWP
Under fixed withdrawal, you opt to withdraw a fixed sum at regular intervals. Say, you own 20,000 units of a mutual fund. You opt for SWP and instruct your fund house to withdraw Rs 10,000 on the 1st of every month, starting from January 1, 2023. If the NAV of the fund is Rs 10, the fund house will redeem 1,000 units every month (10,000/10). After the first withdrawal, you will have 19,000 units left. If the NAV changes to Rs 15 on February 1, 2023, to withdraw Rs 10,000, you will redeem 666.67 units (10,000/15), leaving you with 18,333 units.
Variable Withdrawal on SWP
Variable withdrawal in SWP generally means withdrawing the capital gains incurred periodically. Say you invested ₹100,000 in a mutual fund, and its NAV increased by 2% in the first month, resulting in a gain of ₹2,000. This capital gain of Rs 2,000 will be withdrawn from your investment.
How does SWP work? Example of SWP
SWP works by ensuring you get rewarded for your investment consistently instead of redeeming the entire amount at once. Think of it like getting a salary from your investments. Let’s understand how SWP works:
Assume you have ₹10,00,000. You invest this amount in a mutual fund in January. Now, at the time of investment, the NAV (Net Asset Value) is ₹10. This means you own 100,000 units (10 Lakh/10) of this mutual fund. You set up a SWP to withdraw ₹5000 every month. This is how you would receive withdrawals.
Assuming your investment grows by 12% annually. Let’s see your balance at the end of the year.
Month | NAV | Amount Withdrawn | Units Sold (Amount Withdrawn/NAV) |
Jan | 10 | ₹5000 | 500 |
Feb | 10.10 | ₹5000 | 495.05 |
Mar | 10.20 | ₹5000 | 490.20 |
Apr | 10.30 | ₹5000 | 485.44 |
May | 10.41 | ₹5000 | 480.31 |
Jun | 10.51 | ₹5000 | 475.74 |
July | 10.62 | ₹5000 | 470.81 |
Aug | 10.73 | ₹5000 | 465.98 |
Sep | 10.84 | ₹5000 | 461.25 |
Oct | 11 | ₹5000 | 456.62 |
Nov | 11.11 | ₹5000 | 452.08 |
Dec | 11.22 | ₹5000 | 447.23 |
Total | – | ₹60,000 | 5680.70 |
Balance Units: 100,000-5680.70 = 94,319.3
Final Amount in December: 94,319*11.22 = 10,56,375
The above table shows that despite you withdrawing 60,000 in the entire year, your investment managed to grow to ₹10,54,489. That is the power of SWP.
How to use the SWP Calculator?
SWP calculator is a financial tool that requires you to enter four details to give the total investment and withdrawal amount, along with the final value of the investment after all withdrawals:
1. Total Investment: The total invested amount in the mutual fund scheme.
2. Withdrawal Amount (per month): The amount you wish to withdraw every month (or quarter, year).
3. Expected Return (annualized): The expected rate of annual return from the mutual fund scheme.
4. Time Period: The period of SWP, i.e., the number of years for which you will keep withdrawing funds monthly.
Based on these inputs, the SWP calculator will calculate and show you the following:
- Total Investment: The Total amount invested in the mutual fund.
- Total Withdrawal: Total amount that you would have withdrawn during the SWP period.
- Final Value: Final value of your investment after subtracting the total withdrawal amount.
How Does an SWP Calculator Work?
An SWP calculator saves you from manual calculations by using the following formula:
A = PMT ((1+r/n)^nt – 1) / (r/n))
Where:
- A: Final value of investment
- PMT: Amount withdrawn every period
- n: Number of compounds in a period
- r: Expected annual rate of return
- t: Total number of periods for which the money is invested
Difference between SIP and SWP?
SIP is a Systematic Investment Plan, while SWP is a Systematic Withdrawal Plan. SIP builds in investors a disciplined investment habit. SWP aims to encourage investors with consistent income generation. Under SIP, you invest a fixed amount at regular intervals. With SWP, you withdraw a fixed amount at regular intervals.
SIP is an investment strategy that is used for wealth building and benefits from rupee-cost averaging. With SWP as an investment strategy, investors receive regular income along with capital appreciation and without completely redeeming their investment.
Who should opt for SWP?
SWP may not work for every investor. Here are a few situations where SWP as a strategy may work well:
1. If you are retired
If you are a retired individual and need a steady cash flow. SWP works as a great choice by ensuring your investments are at work while you enjoy a small percentage every month.
2. If you have a lump sum amount
When you have an accumulated corpus and you want to earn consistent income from it. Using SWP helps you invest your money in the market and earn returns consistently.
3. If you need regular income
When you have an outstanding expense like a loan or EMI that needs to be paid out every month. You can use SWP to fund it.
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 in wait for the ‘perfect time’. Instead, they want to earn a small amount from it periodically.
What are the benefits of SWP?
SWP offers several benefits to investors. Some of which include:
1. Regular Income
Most investment strategies focus on staying invested and waiting for compounding to do its magic. But with SWP, you get the best of both worlds, a consistent monthly income while your remaining investment continues to grow.
2. Capital Appreciation
Even though you’re withdrawing regularly, your money stays invested and benefits from market growth. This way, your capital keeps working for you while you enjoy steady withdrawals.
3. Tax Efficiency
SWP proves to be a tax-efficient strategy. Since you’re withdrawing in smaller chunks over time, your capital gains are spread out, reducing your overall tax liability. In contrast, a lump sum withdrawal can result in a bigger tax hit
How to efficiently plan your SWP?
While SWP is an effective strategy, planning it efficiently is as important. Here are some steps you can take to ensure the same:
1. Decide your withdrawal amount
The first step to any planning process is identifying why and how much you need to withdraw every month. This helps you determine the amount and tenure of the investment.
2. Choose the right mutual funds
The next step is to choose the right mutual fund that offers optimum returns. If you choose a mutual fund that yields low returns, SWP will not be as effective. Refer to this guide for choosing the best mutual fund for yourself.
3. Set the right timeline
Know when you need to withdraw every month. Plan and set up the SWP accordingly. Use the SWP calculator to get an estimate of your returns and final value at the end of the investment tenure.
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.
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 and 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 NAV. This is how SWP’s tax treatment is different. Tax will be calculated depending on your periodic withdrawals.