What is Systematic Withdrawal Plan (SWP)?

If you're familiar with mutual funds, you've likely encountered the term SIP, or Systematic Investment Plan. SIPs enable regular investments into a mutual fund scheme.

An SWP, or Systematic Withdrawal Plan, is like the counterpart of SIPs, but for withdrawals. This convenient provision allows you to withdraw a predetermined amount from your mutual fund investment at regular intervals.

This article offers a detailed guide to SWPs and how they may be useful to you in potentially generating regular income or achieving a balanced approach to investment management.

• What is SWP in mutual funds?
• How does SWP Work?
• Key features of SWPs
• SWP vs IDCW
• How to do an SWP?
• Who should consider SWPs?
• Benefits of a Systematic Withdrawal Plan (SWP)

What is SWP in mutual funds?

Overview

Mutual funds typically offer high liquidity, which means that you can redeem all or a part of your investments whenever you need funds. Though redemptions are possible at any time, for the best outcomes, investors should only redeem their investments upon achieving the financial goal for which it was intended.

While one way to do this is to redeem all your investments at the end of your preferred investment tenure, another structured approach is through Systematic Withdrawal Plans (SWPs). Without liquidating your entire holding at once, an SWP offers a systematic way to access your investment returns. You can choose to withdraw either a fixed number of units or a fixed amount at an interval that suits you – monthly, quarterly, half-yearly, or yearly.

SWPs can potentially help provide a regular income stream. Moreover, the money that remains in the fund after an SWP withdrawal can grow if the scheme earns positive returns. Your SWPs can continue till the time that you have units in your scheme. This can potentially be more beneficial in the long term than withdrawing the money all at once.

Let’s illustrate with an example: Imagine you have Rs. 5 lakh invested in a mutual fund with an average annualized return of 12%. If you set up an SWP to withdraw Rs. 10,000 monthly, at the end of the first year, you would have withdrawn Rs. 1,20,000. Meanwhile, the fund balance, if the growth rate continues to be 12%, would be Rs. 3,80,000, and you would have earned Rs. 53,535 as returns. However, returns are not guaranteed and can fluctuate.

How does SWP work?

Imagine you've invested Rs 15 lakh in a mutual fund and want to withdraw ₹10,000 every month to supplement your income. A Systematic Withdrawal Plan (SWP) is a convenient way to achieve this.

The steps:

Setting up your plan: notify your mutual fund provider to initiate an SWP, specifying both the withdrawal amount (Rs 10,000 in this scenario) and the frequency (monthly).

Redemption process: Each month, the mutual fund company sells required units from your portfolio based on the current Net Asset Value (NAV) to meet the withdrawal amount.

Fund disbursement: The value of the redeemed units, in this case, Rs 10,000, are credited to your linked bank account.

Ongoing withdrawals: This process repeats monthly until you either stop the SWP or the remaining investment value is insufficient to cover the withdrawals.

Remember, as units are redeemed over time, your overall investment value may decrease. Over time, this decrease may influence the overall value of your investment.

Key features of SWPs

• Flexibility: You can customize the withdrawal amount and frequency.
• Growth potential: The balance funds can potentially continue to grow subject to positive market performance.
• Income generation: Investors can generate regular income from their investments while the SWP is active.

SWP vs IDCW

Another way to potentially generate income from mutual funds is by opting for Income Distribution Cum Capital Withdrawal (IDCW). Here’s how SWP and IDCW differ. While both aim to provide a cash flow, they differ significantly in their mechanics and implications.

IDCW involves distributing a portion of the fund’s income and capital to investors. The amount distributed depends on the fund’s performance. However, the income generated can be less predictable, as it may not be released on a fixed schedule and depends on the asset management company. Moreover, the distributed amount is classified as dividend income and added to the investor’s income tax slab, which can be less tax-efficient compared to SWP, which is subject to capital gains tax.

Capital gains are the potential profits earned from the difference between the purchase price and the sale price of mutual fund units. For debt funds , capital gains are added to an investor’s income and taxed as per their prevailing tax slab. However, for equity funds, capital gains can either be short-term or long-term. Short-term capital gains are profits on units held for less than a year. In the Union Budget 2024, the Indian government has proposed raising STCG from 15% to 20%. Gains on units held for more than a year are taxed as long-term capital gains. The Budget has proposed raising the LTCG tax rate from 10% to 12.5% and the deduction limit to Rs. 1.25 lakh.

How to do an SWP?

A Systematic Withdrawal Plan (SWP) can be a practical and effective solution for individuals seeking a regular income stream from their mutual fund investments.

Here's a step-by-step breakdown of how an SWP operates:

1. Scheme identification: Begin by selecting the mutual fund scheme that aligns with your investment goals and risk tolerance.
2. Investment:You can either invest in a lumpsum or through a Systematic Investment Plan (SIP) . For the latter, you may choose to invest for a few years and build a corpus before starting your SWP.
3. SWP setup: Instruct the fund house or broker to establish an SWP mandate. Specify the amount you wish to withdraw at regular intervals (monthly, quarterly, or annually) and the bank account for crediting the withdrawals.
4. Withdrawal execution: As per your chosen frequency, the fund house will release the SWP amount. The money can be sent directly to your chosen bank account.
5. Ongoing process: The fund house will continue to redeem units and process withdrawals according to your chosen frequency until you decide to cancel the SWP or the investment is fully liquidated.

Who should consider SWPs?

SWPs can cater to a wide range of investor needs and preferences. Here's a look at who might find SWPs beneficial:

• Those seeking regular income: SWPs can be a suitable option for individuals who require a consistent income stream from their investments, such as retirees or those relying on investment returns for living expenses.
• Those preferring disciplined withdrawals: SWPs can help maintain financial discipline by setting a fixed withdrawal amount and preventing impulsive or excessive withdrawals.
• Those seeking a secondary income source: SWPs can create a steady secondary income stream from existing investments, supplementing your primary income and helping manage rising costs.
• Individuals without pensions: SWPs can serve as a pension plan of sorts. By investing your retirement corpus in suitable mutual funds, you can withdraw regular income at your chosen frequency. Unlike regular pensions or pension plans, however, income and returns are not guaranteed.

Benefits of a Systematic Withdrawal Plan (SWP)

• Flexibility: You can choose the withdrawal amount, frequency (monthly, quarterly, annually, etc.), and even the date for withdrawals.
• Regular income: For those requiring a consistent income stream, SWPs are a reliable solution.
• Capital appreciation potential: If the SWP withdrawal rate is lower than the mutual fund's return rate, your investment can continue to grow over time.
• Reduced market timing risk: By adhering to a disciplined withdrawal schedule, you avoid the risk of making hasty decisions based on short-term market fluctuations.

Conclusion

SWPs can complement your overall financial strategy. Whether you're looking to supplement your income, create a personalized pension plan, or manage your investments during retirement, SWPs can be tailored to your specific needs. They can offer you a reliable income stream while potentially growing your investments based on market growth. Moreover, the tax efficiency of SWPs, with no TDS on gains, adds to their appeal.

FAQs:

Which is better, SWP or fixed deposit?

Fixed deposits do not typically offer staggered withdrawals in instalments. So, SWP is more suitable between the two if you need a regular income stream. Between mutual funds and fixed deposits, the investment option that is more suitable for you depends on your risk tolerance and financial goals. If you're comfortable with some risk and seek potentially higher returns, mutual funds might be suitable. If you prioritize capital protection, fixed interest, and guaranteed returns, FDs may be preferable.

Who can use SWPs?

Individuals seeking a relatively predictable income stream, such as retirees and those seeking a secondary income, may find SWPs to be suitable.

What are SWP interest rates?

Mutual funds do not have fixed interest rates. They offer potential returns on your investment, which are dependent on the underlying mutual fund's performance. The annualized return rate can fluctuate year on year and returns are not guaranteed, but they are typically higher in the long term than bank deposits, especially for equity funds.

Is there any risk in SWP?

SWPs, while offering a steady income stream, are not without risks. Primarily, they are linked to market volatility. If the underlying mutual fund's value declines, the withdrawal amount might erode your principal. Additionally, there's a risk of outliving your investments if

Can SWP be stopped any time?

Yes, if your goals and requirements change, you can stop the SWP through a simple application process. You can go through your distributor or the mutual fund house, depending upon your investment mode (direct vs regular).

Is SWP better than SIP?

The choice between SIP and SWP depends on your financial goals, life stage, and cash flow requirements, as they serve entirely different purposes. An SIP is a way of investing in mutual funds in regular instalments, while SWP is a way of withdrawing money from existing investments in mutual funds in regular instalments. An SIP is suitable for someone seeking to invest money and potentially create wealth in the long term, while an SWP is suitable for someone seeking steady income from their investments (such as retirees).

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.