What is Systematic Withdrawal Plan (SWP)?
Systematic Withdrawal Plan (SWP) is the facility by which an investor can withdraw a pre-determined amount from his existing investments in mutual funds at a pre-decided interval (weekly, monthly, quarterly, semi-annually or annually). Functionally, Systematic Withdrawal Plan (SWP) is similar to Systematic Investment Plan (SIP) but it gives an option to withdraw systematically. This helps in generating a regular cash flow for the investors. SWP in mutual fund is one of the most effective and tax efficient way to earn potential returns.
Key benefits of SWP
Tax advantage- In case of investments in equity mutual funds for a period of more than a year, the long term capital gain is exempted. Only short term capital gains are taxable at the rate of 15% (if the total income does not exceed INR 1 Crore) on withdrawals from equity mutual funds investment within 1 year. Whereas in case of investments in debt schemes, the short term capital gain (invested period is less than 3 years) is added to the investors’ income and taxed as per their tax slab. Long term capital gains in debt schemes are taxed at the rate of 20% with indexation. In Systematic Withdrawal Plan (SWP), the tax is paid only on the gains made due to the NAV movement and not on the principal part in the withdrawals making the overall tax incidence lesser. Unlike SWP, in traditional investment options the entire gain is taxed according to the investors’ tax bracket (the highest currently being 30 %) considering if the investor falls under the highest tax bracket.
Regular supplemental income- The option of SWP in mutual fund can help you by providing a steady source of income from your investments. This is especially useful for those who need money when their cash flow comes to a halt like retirement, or at a time when supplemental income becomes a necessity due to the altered circumstances in life.
Meet financial goals- If planned well ahead of time, SWPs can provide a steady flow of money when most needed. They can therefore be linked to long term financial goals, such as providing a steady income in one’s retirement years or managing your child’s educational expenses.
Who can use SWP?
Systematic Withdrawal Plan (SWP) can be utilized by those who are planning for their retirement in the coming years. Usually the large amount of money that one receives at the time of retirement is invested in traditional savings instruments which attract income tax at the normal rates. Instead, they can make a lump sum investment in mutual funds with SWP facility. In this case, along with earning capital appreciation on the invested amount, he/she can receive a fixed amount monthly. It will help you in getting a regular income like salary even after retirement.
However, the use of SWPs may not be restricted to retirees alone. It is also useful for middle-aged professionals who have the responsibility of their family. They can use SWP option to get a constant source of fund for their dependents. They can plan it for their child’s educational expenses. They can even plan for a constant source of money for their retired parents.
SWP calculators are also available. One can easily make all the necessary calculations before investing. The SWP calculator helps in determining the amount to be invested, withdrawal amount and the tenure. It also helps in understanding SWP meaning in mutual fund in a better way.
A mutual fund SWP is designed keeping in mind the needs, interests and financial goals of the investors. By judiciously using tools like Systematic Investment Plan (SIP) and Systematic Withdrawal Plan (SWP), you can meet your financial goals without having to go through the hassle of timing the markets and making wrong financial decisions that may cost you dearly and throw you off track.
Tax efficiency through SWP
Click here for a detailed description and better understanding of what is SWP in mutual funds.
Disclaimer: The above information is prepared for the purpose of investor education only and intended to consider as investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Investors should consult their financial advisers before taking any investment decision.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.