SWP in Mutual Funds - How It Works, Benefits and Features

As an investor, any individual can be a part of a mutual fund through mainly 2 methods: a lumpsum investment plan or a systematic investment plan(SIP). There is a new system that helps these investors withdraw their investments over time, which is known as the SWP or  Systematic withdrawal plan. 

In this article, we will be discussing more of SWP meaning in mutual funds, features and other key information about this plan.

You can also check our article on SIP vs SWP to get a more distinct view of the difference between both investment plans.

What is SWP in Mutual Fund?

An SWP or systematic withdrawal plan in mutual fund is a method that allows investors to withdraw their funds regularly and periodically. One can decide the amount and the date to withdraw the fund, i.e. the frequency of withdrawal which can be monthly, quarterly, half-yearly or even annually. 

Once the SWP is set up the fund house will redeem the adequate units as per the SWP plan in mutual fund from the investor's mutual fund holdings and credit the amount to their bank accounts. This process can be closely related to that of SIP, but instead of investing systematically here, you are withdrawing it.

The major highlight of a SWP is that it provides a fixed stream of income. It is usually employed by retirees or individuals who want a secondary source of income generated. Also, SWPs do not require one to sell all their securities at once but sell only the required units of the fund which equates to the withdrawal amount. 

Features of SWP in Mutual Fund

1. Regular Income:

Through SWP, an investor gets a regular flow of income at periodic intervals like on a monthly, quarterly, half-yearly or yearly basis.

2. Flexibility:

Investors can change and adjust their withdrawal amounts and duration based on their financial objective, this helps the investors to manage their unexpected financial needs and circumstances.

3. Liquidity:

SWP offers liquidity by allowing investors to withdraw their capital any time they need, and also they can cancel the SWP plan at any point in time.

Benefits of SWP (Systematic Withdrawal Plan)

1. Flexible Withdrwals:

Investors have the flexibility to choose the amount they want to withdraw and how frequently they want these withdrawals: monthly, quarterly, or yearly. This all works together to help individuals to plan their financial needs and goals.

2. Predictability:

Investors can predict the cashflows which makes it easier for the investors to plan their finances accordingly. As the fixed withdrawal amount remains stable market fluctuations won't affect the income earned.

3. No TDS:

Unlike the case of fixed deposits, SWPs do not require the investors to pay any TDS at the time of withdrawal for resident individual investors. 

Explore more about the new income tax slab and the role of tax havens in tax planning in our latest articles.

How does SWP work?

SWP is a method which allows investors who want to withdraw their funds in small amounts periodically to meet their financial objectives. Here is the step-by-step method of how SWP works:

1. Once you have a corpus in your Mutual fund, you can opt for a SWP plan to withdraw a fixed amount of money from your fund at regular intervals.

2. When the withdrawal date arrives, the fund house will sell the adequate units of mutual funds as per the investors required amount and credit it to the their account.

3. The fund house continues to redeem the investment for the fixed period set until you cancel the SWP plan or all your units have been sold.

4. The remaining amount remains invested in the mutual funds and helps the investors earn returns on the balance amount based on the fund’s performance.

You can understand this better through the example mentioned below:

Understand SWP using an Example

On January 1, 2024, John maintained a corpus of RS.10,00,000 in a balanced mutual fund, which has an NAV of Rs.100 per unit; this means that John has 10,000 units(10,00,000/100) of that fund in his possession. 

He sets up an SWP that allows him to withdraw Rs. 10,000 every month. In February the NAV of the mutual fund raised Rs.102, so to withdraw Rs. 10,000, the fund house sold 98.03 units (Rs.10,000/Rs.102). The remaining units in the fund which is 9,901.97 will remain invested in the fund until the next month. In March the NAV of the fund has increased to Rs. 105 which means the fund house sells 95.23 units(Rs.10,000/Rs. 105). The remaining funds will either appreciate or depreciate based on how well they perform in the market over time. This way John can get regular income and also allow his remaining investment more time for growth or loss as the market performs.

What are the Tax Benefits of SWP in Mutual Funds?

The withdrawal of funds using SWP is subject to taxation. In the case of equity funds, if the holding period is less than one year, then capital gains realised will be taxed at a 20% rate. On the other hand, long-term capital gains realised will be taxed at a 12.5% rate.

As for Debt funds, if the holding period is less than 36 months, it is treated as short-term capital gains and is taxed under the investor’s income tax rate applicable. Capital gains after 36 months are termed long-term capital gains and are taxed at 12.5% without indexation benefits.

However, there is no TDS(tax deducted at source) on the SWP redemptions.

Conclusion

Through this article, we can understand the Systematic Withdrawal Plan is an important method to generate decent returns over the years. It can be used effectively to meet one’s financial needs by withdrawing a portion of funds regularly and reinvesting the remaining amount for capital appreciation.

To invest in a SIP or SWP option you can check out the best app for mutual funds, Rupeezy Invest and make informed decisions to achieve your investment goals.