As you move closer to your financial goals or step into retirement, generating a regular cash flow from your investments becomes a priority. While most people are familiar with SIPs (Systematic Investment Plans) as a way to invest, fewer know about its counterpart, the Systematic Withdrawal Plan (SWP) - which allows for periodic withdrawals from mutual fund investments.
In this article, we will explain what a SWP in mutual fund investing is, how it works, who it is ideal for, and how you can start a SWP plan that suits your financial goals.
What is SWP in Mutual Fund?
A Systematic Withdrawal Plan (SWP) is a facility that allows investors to withdraw a fixed amount from their mutual fund investment at regular intervals - typically monthly, quarterly, or annually. The amount withdrawn is either transferred to your registered bank account or used to fund other investments, depending on your instruction.
In essence, the SWP provides a way to create a predictable cash flow from your existing corpus, till units last. It is particularly useful for those seeking a steady cash flow without redeeming their entire investment or depending on dividends. The SWP is more suitable for retirees, individuals with recurring financial commitments, or investors aiming to supplement their income while keeping the rest of the corpus invested.
How Does SWP Work?
When you initiate the SWP, mutual fund units are redeemed periodically to meet your withdrawal request. For instance, If your chosen amount is ₹10,000 per month, the mutual fund will calculate the number of units required to generate ₹10,000 based on the prevailing Net Asset Value (NAV) on the date of withdrawal.
For example:
If the NAV is ₹50, and you want to withdraw ₹10,000, then 200 units (10,000 ÷ 50) will be redeemed. The remaining units continue to stay invested, participating in potential market gains or losses.
SWPs can be structured for:
- Fixed amount withdrawals: A pre-decided sum withdrawn at fixed intervals only till units last.
Key Features of SWP
Here are the standout features of SWP:
- Customisable Frequency: Monthly, quarterly, half-yearly, or annually.
- Flexible Amounts: You decide the amount and duration of withdrawals.
- Residual Corpus Growth: The remaining investment continues to earn returns.
- Tax Efficiency: Especially for long-term capital gains, SWPs can be more tax-efficient than traditional income tools like IDCW.
- No Mandatory Lock-In: Except for ELSS and certain other schemes which are subject to mandatory lock-in, most mutual funds schemes allow SWPs without any lock-in.
Benefits of Starting SWP in Mutual Funds
1. Regular Income Stream
SWP offers financial comfort by generating a stable cash flow till units last. It is ideal for retirees, freelancers, or anyone with irregular cash inflows.
2. Preserves Investment Discipline
Rather than redeeming your entire corpus impulsively, SWPs allow for systematic withdrawals while keeping your investment partially intact.
3. Tax Efficiency
In SWP, you redeem units instead of receiving interest or dividends. This means capital gains tax is applicable - but only on the withdrawn portion and only on actual gains. Long-term capital gains on equity funds up to ₹1.25 Lakh (from FY2024-25) per financial year are tax-free.
4. Mitigates Market Risk
Since you withdraw small portions regularly, your exposure to market volatility is potentially reduced over time.
5. Legacy Planning Tool
SWPs can help senior investors ensure a predictable cash flow for themselves while preserving capital for beneficiaries.
SIP vs SWP: What's the Difference?
While SIP and SWP sound similar, they serve opposite purposes. Here’s a quick look:
| Feature | SIP | SWP |
|---|---|---|
| Purpose | Investment in mutual funds | Withdrawal from mutual funds |
| Direction | Bank to Mutual Fund | Mutual Fund to Bank |
| Suitable For | Accumulation phase (wealth building) | Distribution phase (income generation) |
| Investor Profile | Young earners, long-term goal seekers | Retirees, passive income seekers |
| Tax Impact | No tax on investment, capital gains on redemption | Capital gains tax on each withdrawal |
Who Should Consider SWP?
SWPs are especially suitable for:
- Retired Individuals: To receive a steady monthly income in lieu of a pension.
- Parents Funding Education: Withdraw monthly or quarterly to meet tuition and living expenses.
- Freelancers & Business Owners: Those with unpredictable income can create stable cash flow through SWPs till units last.
- Goal-Based Investors: If your investments have matured, you can slowly withdraw for planned expenses like travel, medical care, or a second home.
How to Start SWP in Mutual Funds
Starting SWP is simple and can be done through your AMC’s website, a registered distributor, or online mutual fund platforms. Here's a step-by-step guide:
Step 1: Choose the Right Mutual Fund
Pick a mutual fund with a history of consistent performance. Debt or hybrid funds are commonly used for SWPs due to their stability, although SWPs from equity funds are also possible.
Step 2: Decide the SWP Amount and Frequency
Choose the withdrawal amount based on your financial needs. Keep it conservative so the residual investment can continue compounding.
Step 3: Fill the SWP Form
This can be done digitally or physically. You will need to specify:
- Folio number
- Fund name
- SWP amount
- Frequency (monthly, quarterly, etc.)
- Start date and end date
Step 4: Submit the Form
Once processed, the SWP will begin as per your instructions.
Step 5: Monitor and Review
Review your portfolio periodically to ensure your withdrawals align with market conditions and fund performance.
Example: How an SWP Works in Practice
Suppose you have invested ₹12 lakhs in a balanced fund. You decide to withdraw ₹10,000 every month for five years.
- If the fund earns 8% per annum on average, you will receive your desired monthly cash flow while still preserving the unwithdrawn part of the corpus at the end.
- If market returns fluctuate, your unit redemption amount would vary but still provide a fixed monthly payout.
This structured withdrawal helps bridge income gaps without liquidating the entire investment.
Taxation on SWPs
Tax on SWP withdrawals is based on the type of fund and the holding period:
- Equity Mutual Funds:
- Long-term (held >1 year): 10% on capital gains above ₹1.25 (from FY2024-25) lakh/year.
- Short-term: 15% on gains.
- Debt Mutual Funds (as per new tax rules from April 1, 2023):
- All gains taxed as per investor’s income slab, regardless of holding period.
It is important to note that only the gain portion in each withdrawal is taxed, not the principal amount. This offers an advantage over traditional fixed income tools where the entire interest earned is taxable.
Things to Keep in Mind Before Starting SWP
- Avoid over-withdrawing: Ensure the withdrawal rate doesn’t deplete your capital prematurely.
- Understand fund risk: The fund's asset class (equity, debt, hybrid) should match your risk tolerance.
- Check exit load: Some funds levy exit loads if units are redeemed within a certain time frame.
- Inflation: Plan your withdrawals considering future inflation or periodically adjust the amount.
Final Thoughts
The SWP in mutual funds is an effective way to create a passive cash flow stream while continuing to stay invested. Whether you are retired, self-employed, or simply want regular access to your money without disturbing your long-term investments, an SWP plan offers flexibility, tax advantages, and financial control.
Before starting a systematic withdrawal plan, carefully evaluate your income requirements, investment horizon, and the type of mutual fund best suited for your goals. Consulting a financial advisor can help tailor the SWP to your needs.
Disclaimers:
An Investor Education and Awareness Initiative by Tata Mutual Fund
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