Withdraw Smartly: A Guide to Systematic Withdrawal Plans (SWP)

If investors want regular cash flow from their investments the automatic choice for many are bank fixed deposits or postal deposits. However, declining interest rates on these schemes have made investors worry about their future income needs.

Mutual funds have a solution for this, called SWP.

What is SWP in mutual funds?

Mutual funds have a solution for this, called SWP. What is SWP in mutual funds? SWP or systematic withdrawal plan is a mutual fund investment plan, 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.

The investors can choose a day of the month/quarter/year when withdrawal can be made and the amount credited to investors bank account by the AMC. To generate this cash flow, SWP Plan redeems units of the mutual fund scheme at the chosen interval. Investors can continue with SWP as long as there are balance units in the scheme.

Discover how SWP works

SWP generates income by selling units from the scheme regularly. The number of units sold depends on the SWP amount and the scheme NAV on the withdrawal date. For instance, if an investor puts Rs 10.00 lakhs in a mutual fund scheme with a purchase NAV of Rs 20, they get 50,000 units. If they start a monthly SWP of Rs 6,000 after a year, assuming the NAV is Rs 22, the AMC redeems 272.728 units in the 1st month. The remaining units are now 49,727.272. This process continues monthly. If the NAV appreciates more than the withdrawal rate, the investment value increases; otherwise, it decreases.

Advantages of SWP

1. Regular Income Streams: SWP provides a systematic way to generate regular income from your mutual fund investments, allowing you to plan your cash flow effectively.
2. Flexibility in Withdrawals: Investors have the flexibility to choose the frequency of withdrawals (monthly, quarterly, etc.) and the amount they wish to withdraw. This adaptability caters to individual financial needs.
3. Professional Management: SWP is an actively managed approach, and fund managers can make strategic decisions based on market conditions, potentially optimizing returns.
4. Potential for Capital Appreciation: If the scheme’s Net Asset Value (NAV) appreciates over time, the investor might experience capital appreciation, enhancing the overall investment value.
5. Tax Efficiency: In some cases, SWP may have tax advantages. Capital gains tax is applicable only on the redeemed amount, and if held for the long term, it can qualify for lower tax rates.
6. Diversification Benefits: Investors can enjoy the benefits of diversification by investing in various asset classes through a single SWP plan, reducing risks associated with a single investment type.
7. Disciplined Approach: SWP helps in maintaining a disciplined approach to withdrawals, preventing impulsive decisions during market fluctuations.
8. Liquidity Management: SWP provides a method for managing liquidity needs while keeping the remaining investment in the market to capture potential future gains.

Investors should carefully consider their financial goals and risk tolerance before opting for an SWP.

SWP (Systematic Withdrawal Plan) can be beneficial for various types of investors based on their financial goals, risk tolerance, and income needs. Here are the types of investors who can consider using SWP:

Who Benefits from SWP?

1. Retirees: SWP is commonly used by retirees who are looking to convert their accumulated savings into a regular income stream during retirement. It helps in managing expenses and maintaining financial independence.
2. Conservative Investors: Investors with a conservative risk profile who prefer regular income and capital preservation may find SWP suitable. It allows them to withdraw funds while keeping the remaining investment intact.
3. Goal-Based Investors: Individuals saving for specific financial goals, such as a child’s education or a home purchase, can use SWP to generate periodic payouts aligned with their goal timelines.
4. Income Generation: Investors seeking regular income from their investments can opt for SWP as a strategy to supplement their salary or other income sources.
5. Diversification Seekers: Investors who want to benefit from diversification across different asset classes can use SWP to withdraw profits from a well-diversified portfolio, helping to manage risks.
6. Market Timing Concerns: Investors who are concerned about market timing and want to lock in profits during favorable market conditions may use SWP to systematically withdraw funds.
7. Tax Planning: SWP can be used as a tax-efficient strategy. Long-term capital gains tax, which is usually lower than short-term gains tax, may apply for withdrawals made after holding the investment for a specified period.
8. Wealth Preservation: High-net-worth individuals looking to preserve their wealth while still enjoying some liquidity can use SWP for controlled and planned withdrawals.

Tax Benefits with SWP

When units are redeemed to draw the SWP amount, it attracts capital gain (in case the redemption NAV is higher than the purchase NAV) on the profits made from the sale of units. The capital gain can be defined as short term or long term as per following conditions

Taxation of Capital Gains of Equity Funds

Equity funds are those mutual funds where more than 65% of it total fund amount is invested in equity shares of companies. As mentioned above, you realise short-term capital gains if you redeeming your equity fund units within a one year. These gains are taxed at a flat rate of 15%, irrespective of your income tax bracket.

You make long-term capital gains on selling your equity fund units after holding them for over one year. These capital gains of up to Rs 1 lakh a year are tax-exempt. Any long-term capital gains exceeding this limit attracts LTCG tax at 10%, without indexation benefit.

Taxation of Capital Gains of Debt Funds

Debt funds are those mutual funds whose portfolio’s debt exposure is in excess of 65% and equity exposure is not more than 35%. Starting 1st April 2023, the debt funds will no longer receive indexation benefit and deemed to be short-term capital gain. Therefore, the gains from debt funds will now be added to your taxable income and taxed at the slab rate.

Earlier, the long-term capital gains from debt funds were taxed at 20% with indexation benefit. 

Taxation of Capital Gains of Hybrid Fund

The rate of taxation of capital gains on hybrid or balanced funds is dependent on the equity exposure of the portfolio. If the equity exposure exceeds 65%, then the fund scheme is taxed like an equity fund, if not then the rules of taxation of debt funds apply.

Therefore, it is essential to know the equity exposure of the hybrid scheme you are investing in, if not then you might be in for a nasty surprise on redemption of your fund units. The following table summarises the rate of taxation of capital gains on mutual funds

Top 5 SWP Mutual Funds

When it comes to choosing the right SWP in mutual funds, the options can seem endless. However, we have listed down the best SWP mutual fund plans that you can check out. 

ICICI Pru Equity & Debt Fund – Growth

19.17%(5 Years Annualised)

Quant Absolute Fund – Growth

21.99%(5 Years Annualised)

Kotak Equity Hybrid fund – Growth

16.25%(5 Years Annualised)

HDFC Balanced Advantage Fund – Growth

18.56%(5 Years Annualised)

SBI Equity Hybrid Fund – Growth

13.35%(5 Years Annualised)

*Return as on 15th December 2023

Congratulations! You have learned all about “Withdraw Smartly: A Guide to Systematic Withdrawal Plans (SWP)“

Disclaimers:
An investor education initiative By Findola Wealth Research Team.

This article is generated and published by Findola Wealth Research Team.

Investment in securities market are subject to market risks, read all the related documents carefully before investing.

This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.