Systematic Withdrawal Plan (SWP) – Mutual Fund

SWP or systematic withdrawal plan is a facility offered by Mutual Funds, through which investors can withdraw fixed amounts at regular intervals, for example – monthly/quarterly/yearly from the investment they have made in any Mutual Fund scheme.

Key Feature:

SWP generates cash-flows (income) by redeeming units from the scheme at the specified interval. The number of units redeemed to generate this cash flow depends on the SWP amount and the unit price (Net Asset Value) on the withdrawal date.

Benefits of SWP:

Flexibility:

In a SWP plan, investor has the flexibility to choose the amount, frequency and the date according to his/her needs. Also, the investor can stop the SWP at any point in time.

Regular Income:

SWP in mutual funds facilitates investors by providing a regular income from their investments. Therefore, this becomes highly convenient and useful for those who need regular cash flow for meeting regular expenses.

Capital appreciation:

If the SWP withdrawal rate is lower than the fund return, the investor gets some capital appreciation too in the long term.

No TDS –

For resident individual investors, there is no TDS on the SWP amount.

Tax efficiency –

Investors in high tax bracket find SWP useful as the capital gains from equity/equity-oriented funds are taxed moderately – 15% for profits made on withdrawals within one year (Short-term Capital Gain) and 10% for profits made on withdrawals after one year (Long-term Capital Gain)

Conclusion:
To give a perspective to SWP, we append below the returns and effective tax on an initial investment of Rs. 1.20 crores and a monthly withdrawal of Rs. 1 lakh considering actual NAVs during April, 2013 to March, 2021 for a large-cap MF.
Start Date01-04-2013
End Date01-03-2021
Initial Investment12,000,000
Monthly Withdrawal100,000
Total Withdrawal9,500,000
Maturity Value20,767,069
Total Value30,267,069
Tax Paid334,228
Net Profit17,932,841
Effective Tax Rate3.52%
Return15.93%

 

To sum up, SWP is a good strategy to have a regular income with a defined periodicity. A SWP can also be set up to withdraw only the capital appreciation portion. The good part is that the returns are tax efficient and there is no TDS on gains unlike traditional investment options.

 

Disclaimer:

The past performance of Mutual Funds is not necessarily indicative of the future performance of the schemes. Mutual Funds are subject to market risk. Please note nothing in this Blog should be construed as advice from us. Our Company is in the business of distribution of suitable Financial Products to Investors describing Product Specifications, Material Facts and the associated Risk Factors. We are acting as a Distributor for these Products and facilitating Transactions.

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