What is SWP

SWP – Systematic Withdrawal Plan – What is it & how it Works

Systematic Withdrawal Plan or SWP is the opposite of what Systematic Investment Plan (SIP) is. While in the latter your invest a fix amount in Mutual Funds on regular intervals, the former allows you to withdraw the invested amount on an already set date which can either be annually, half yearly, quarterly or even monthly.

Mutual Fund SWP is a scheme used to redeem the lump sum Mutual Fund investment in regular installments. While SIP channelize your savings into mutual fund, SWP channelize your investments into your savings. This is one of the best ways to deal with the volatility of the market.

Choosing the Systematic Withdrawal Plan will help you customize the cash flow as per your need. It is up to you whether to withdraw just the capital gains on the investment or a certain fixed amount from your investment. This way your money will still remain invested in the scheme, giving you certain regular income and returns. You can reinvest the withdrawn amount or keep it as liquid asset (in bank or as cash).

What is the need to choose Systematic Withdrawal Plan?

You must be well aware that Mutual Funds are subject to market risks, which means the fluctuations in the market may adversely impact the Net Asset Value (NAV) of your fund. It may happen that you may lose out on the fund returns if not withdrawn on time.

Hence, with the help of an SWP, you can timely withdraw your funds as per your financial requirements. If you invested in mutual fund to achieve some goals, SWP is a great option to ensure that the funds are available with you at the right time. Thus, your financial goal can be achieved right on time without facing any cash crunch.

As an investor, SWP can help you earn additional income along with your salary from the job. It is a great way to have periodic incomes for your planned expenditures like travel or any other needs. SWP must be created in a way that it makes the cash available in hand, whenever you need money the most.

What are the benefits of SWP as an investment option?

Basically, there are two main factors that make SWP a wise investment strategy.

First, these withdrawals (also known as redemptions) done through SWP are not subjected to Tax Deduction at Source. Though the capital gains occurred on the withdrawals are taxable.

Second, you don’t need to withdraw the invested amount. You can simply withdraw the appreciation made on the investment amount, and this way you can enjoy the gains on a regular interval while keeping your capital invested.

How can you withdraw via SWP?

Well, there are two types of withdrawal option that you have with SWP. You can either withdraw a fixed amount or appreciation amount.

If you choose to go with the fixed withdrawal option, you get a specific amount on regular intervals like monthly or quarterly.

With appreciation withdrawal option, you are only eligible to get the appreciated amount on a monthly or quarterly interval.

How does a Systematic Withdrawal Plan works?

Systematic Withdrawal Plan affects your Mutual Fund account in a way that the value of your fund is reduced by the number of units you withdraw.

In SIP more units are purchased when the market is low and lesser when the market is moving upward, similarly in SWP, more units are withdrawn when the Net Asset Value of the scheme is lower and lesser units are withdrawn when the NAV is higher.

For example, suppose you have 5000 units in your Mutual Fund scheme and you wish to withdraw ₹2000 every month through SWP to achieve a certain goal.

Assuming that the NAV of scheme is ₹10, the withdrawal of ₹2000 can only be possible if 200 units (withdrawal amount/NAV) are sold. Hence, the remaining balance in the Mutual Fund account after this withdrawal will be 4800 units (5000-200). During the next month, if the NAV increases to ₹20, then the amount of ₹2000 can be withdrawn by selling 100 units. Hence, the Mutual Fund balance will decline to 4700 (4800-100) units post this withdrawal.

With each withdrawal, there will be a declination in the number of units in the Mutual Fund account. Hence, it is advised to plan your SWP as per the requirements and goals. An unplanned SWP may have a detrimental effect on the value of your Mutual Fund.

What are the Tax implications of SWP?

SWP has come out as an alternative to Dividend plans. While dividend incurs Dividend Distribution Tax, which is often deducted at source by the Asset Management Company (AMC) from the dividend amount and reduces the in-hand return to the investor, SWP allows the investor to fetch regular income from the equity funds and to optimize the tax on long-term capital gains (LTCG) accrued on the amount withdrawn via SWP.

SWP allows the tax benefit on long-term capital gains up to the amount of ₹1 lakh. The investor will be liable to pay tax only on the gains over and above ₹I lakh.

For example:

You have invested ₹25 lakh in an equity mutual fund and you desire to withdraw 12% per annum after the one year of investment. Hence, your withdrawal amount will be ₹25,000 per month or ₹3 lakh in a year.

Assuming the rate of return as 12% p.a., an investor would be paying only a 2% of the amount withdrawn as short-term capital gains tax. The LTCG tax liability will incur in the 4th or 5th year of the withdrawal as during that time the profit amount would be more than ₹1 lakh. Hence, the liability will be approx 1% of the amount withdrawn as compared to receiving dividends where the effective rate of Dividend Distribution Tax is 11.65% irrespective of the dividend amount.

Last Words

Now that you are aware of what SWP is, what are its benefits, and how it works, it’s time to start getting returns from your invested funds on a regular basis through SWP.

Log on to https://investment.karvyonline.com/ and start an SWP now!