A Systematic Withdrawal Plan (SWP) is a facility offered by mutual funds where an investor can withdraw a predetermined amount of money at regular intervals from their investment in the fund. This allows investors to create a steady stream of income from their mutual fund investments. You can choose the amount and frequency of withdrawal. You can also choose to just withdraw the gains on your investment keeping your invested capital intact. It is a facility to redeem units regularly choosing a frequency of withdrawals. Either a fixed amount or only capital appreciation can be withdrawn.
Here’s how a Systematic Withdrawal Plan typically works:
Key Benefits of Systematic Withdrawal Plan (SWP)
Tax Benefits
As an investor you can either opt for dividend or systematic withdrawal plan (SWP) as a regular income. In the case of Dividend option, fund house distributes dividend after deducting Dividend Distribution Tax(DDT) at the source. The rate for which is 10%. But if you opt for SWP, then no tax deducted at source. However, capital gain tax will be applicable as per the type of the scheme and amount withdrawn. Below are some examples of tax for different schemes.
| Type | Short term capital gains tax | Long term capital gain tax |
|---|---|---|
| Equity mutual Funds | 15% | 10% without Indexation |
| Balance mutual funds | 15% | 10% without Indexation |
| Debt Mutual fund | As per tax slab | 20% after Indexation |
Averaging Costs
Since the markets are volatile, when you are redeeming all your units together, the timing of the sale needs to be when the markets are doing well. This ensures that you book good profits. If you end up selling during a slump, your profits can be impacted.
But when you opt for SWP, a certain number of units are redeemed regularly. Therefore, there will be times when the markets are high on the date of redemption and when they are low. This averages your returns and protects you from potential losses which can arise if you sell your units during a bear-run.
Discipline
Just like SIP helps to learn the discipline of investing regularly, an SWP helps clear of withdrawing large amount of money due to panic of Market fluctuations.
Summary
Systematic Withdrawal Plan cn be effectively used to create a regular source of secondary income. This can be used to reinvest in some other schemes or to fund some recurring expense keeping the principal intact. It also helps to average out market fluctuations and not require to time the market for withdrawals.
Note: Tax % is given as an example, and you should cross verify from income tax portal for latest rate. Also, note that this is not an advice and just for education purpose.