What is Systematic Withdrawal Plan (SWP)?
Last Updated on June 22, 2021 by Chitale CFS Pvt Ltd
Systematic Withdrawal Plan or SWP is an investment tool where an investor can redeem the investment from mutual fund scheme in a disciplined way. Instead of withdrawing lump sum amount, an investor can withdraw money through fixed or variable installments every month or quarter or semi annually or annually depending on investor’s financial requirements.
Systematic Withdrawal Plan works exactly opposite of Systematic Investment Plan (SIP). Once you invest lump sum amount in SWP, you direct your regular withdrawals from mutual fund scheme to your saving bank account whereas as in SIP, you direct your regular investments from bank account savings into the preferred mutual fund scheme. Systematic Withdrawal Plan is also one of the best strategies to deal with market volatility.
Investors mostly use a systematic withdrawal plan (SWP) to build corpus for retirement. However, investors can also utilize SWP benefits for various other payout requirements. Through Systematic Withdrawal Plan (SWP), an investor can easily customize the cash flow by choosing withdrawal of either the capital gains on investment or a certain fix amount withdrawal. The plan also helps to beat inflation in long term.
Systematic Withdrawal Plan (SWP) is an investment platform which literally means “the best of both worlds” as you can have your money invested in mutual fund scheme while you can draw regular income or returns. An investor can also reinvest these gains in some other mutual fund schemes like Systematic Investment Plan or Systematic Transfer Plan.
How Systematic Withdrawal Plan works?
As we are aware that market volatility might impact your mutual fund investments, especially when your invesment goals are very close to accomplishment. If investors do not withdraw returns gained from market on time, the fluctuations in NAV can badly affect your investment objectives. You can always consult your mutual fund distributor regarding booking profits from mutual fund schemes.
Systematic Withdrawal Plan (SWP) works best when your financial goal like child education planning, retirement planning etc requires regular funding. Systematic Withdrawal Plan (SWP) ensures to avail constant source of cash flow so that you can accomplish an investment objective very efficiently as chances of facing cash crunch can be avoidable in SWP.
Systematic Withdrawal Plan (SWP) is also helpful to generate extra source of income in addition to your salary. Through Systematic Withdrawal Plan (SWP), an investor can create a continuous flow of income from the mutual fund scheme.
If your job or business requires constant travelling, Systematic Withdrawal Plan (SWP) can help you in great way to have a constant cash flow which can work as periodic provision for your travel. Investment model in Systematic Withdrawal Plan (SWP) should be designed in such a way that it can avail cash flow when you need cash the most.
Systematic Withdrawal Plan Calculations:
Imagine you have 5,000 units in a mutual fund scheme and you have provided instructions to the AMC that you wish to withdraw Rs. 5,000 every month through Systematic Withdrawal Plan (SWP).
Let’s assume, On 1st July, the NAV of the scheme is Rs. 10.
Equivalent number of Mutual Fund units you need to redeem = Rs. 5,000/Rs. 10 = 500
500 units would be redeemed and Rs. 5,000 would be given to you in the month of July.
The remaining units in your mutual fund scheme = 5,000-450=4500
Now, let’s imagine, on 1st August, the NAV becomes Rs. 15.
So in this case the equivalent number of mutual fund units you need to redeem = Rs. 5000/Rs. 15 = 333
333 units would be redeemed from your mutual fund scheme and Rs. 5,000 would be given to you in the month of August.
Now the remaining units in your mutual fund scheme = 4500-333=4167.
This process continues till the time you have instructed AMCs to provide regular withdrawals.
So you will have lesser units as you keep withdrawing the fund. NAV will play a major part in this process as you will need to redeem fewer units at higher NAV. Similarly, if NAV falls, it will have opposite effect on your regular withdrawals as you will need to redeem more units in this case, that is why planning is very important while investing in Systematic Withdrawal Plan (SWP).
You can use our Systematic Withdrawal Plan Calculator or SWP Calculator to get an idea about your SWP investments.
Taxes on Systematic Withdrawal Plan (SWP):
The redemption through a Systematic Withdrawal Plan (SWP) is subject to taxation.
The cost for the purpose of taxation on SWP redemption works as per the first in first out (FIFO) model where you are assumed to redeem the units that you had bought first.
If we further categorize your investments in Systematic Withdrawal Plan on the basis of debt or equity funds, the taxation is different for both cases.
In case of debt mutual funds, if an investor is holding the investment for less than 36 months, then the amount that the investor withdraws will be considered as a part of his or her income and it will be taxed as per the income slab.
On the contrary, if the investor holds his or her investments more than 36 months, then the income will be considered as long-term capital gains and the returns will be taxed at 20% after indexation.
In case of equity funds, if the investor is holding the investment for less than one year, then the capital gain will be taxed at the rate of 15%. On the contrary, if the holding period of investor is more than one year, then the returns will be considered as the long-term capital gains and will be taxed at 10% pa after getting deduction of one lakh rupees from the actual capital gains earned.
Who should invest in Systematic Withdrawal Plan (SWP)?
Systematic Withdrawal Plan is most useful for investors who are looking to receive regular income, more specifically the senior citizens. In addition to this, investors can invest in Systematic Withdrawal Plan (SWP) if:
1) Investor wants a regular stream of income
2) Investor is on a sabbatical and need fixed income
3) Investor is looking to start their own business and need extra income to take care of their expenses
4) Even simply because investor wants to increase his or her cash flows in addition to salary or business income
Systematic Withdrawal Plan Benefits:
Systematic Withdrawal Plan helps to generate regular flows of income:
With the help of SWP, investors can create a constant flow of cash through withdrawals from the existing mutual fund investment. Unlike any other investment tool, SWP helps you to redeem your investment through actual cash flow without liquidating your entire investment.
Systematic Withdrawal Plan is a best alternative for retirement plan:
Mutual fund SWP is most commonly used for retirement as it helps you to receive regular cash flow from your existing mutual fund investments. It not only helps to optimize mutual fund portfolio but also serves as a better option than traditional retirement schemes such as National Pension Scheme (NPS), Public Provident Fund (PPF) etc
Staying Invested with Systematic Withdrawal Plan:
While SWP allows you to withdraw fixed amount regularly from your ongoing mutual fund investments, your remaining amount remains invested and it provides you a chance to get better returns over the period of time.
Hence SWP is one of the best investment tools to draw regular cash flow from your investments. Investors must take advantage of this platform to gain additional income from mutual fund schemes.
Why Chitale CFS Pvt Ltd?
Chitale CFS Pvt Ltd offers wide variety of investment avenues for short as well as long term investment needs. With more than 30+ years of experience, we are one stop solution for a number of financial products like Mutual Funds, Insurance, Bonds, Fixed Deposits etc. We serve our clients with highest standard of transparency and integrity by putting investor’s interest first.
Mutual fund investments are subject to market risks. Please read the offer document carefully before investing