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A systematic withdrawal plan is the opposite of SIP. It allows you to create a series of receivables from your mutual fund investment regularly on a pre-decided date. Unlike lump-sum withdrawal, SWP will enable investors to customise withdrawal from the corpus in a phased way.
You can withdraw the capital gain or a fixed amount, whereas the residue gets reinvested in the scheme. This way, you can stay invested for a long time and receive a regular income. The receipt can be reinvested or used to meet cash requirements.
Let’s understand with an example.
Suppose you invested Rs 100,000 in a mutual fund for one year and decided to withdraw Rs 5000 per month. So every month, your investment amount will get reduced by Rs 5000 and paid to you.The remaining amount after each month will continue to generate returns from the investment.
• Flexibility: SWP allows investors to select the amount, date, and frequency to receive income from an SWP. Also, one can stop it at any time.
• Regular income:SWP lets mutual funds investors receive a steady income from their investment. Hence, investors needing a stable cash flow for meeting everyday expenses, like the retired investors, can invest in SWP schemes.
• Capital appreciation: The regular withdrawal is less than the returns earned from the investment. Hence, the investors get some capital appreciation in the long run.
• No TDS:There is no TDS deducted on SWP for resident investors
As an investor, you may know that market fluctuations can directly impact your returns from mutual funds investment. Meaning, it affects the NAV and lowers the value of the asset if not withdrawn on time.
With an SWP plan, you can withdraw as per your financial needs. If your goal requires funding in a phased manner, you can facilitate cash requirements with an SWP.
An SWP can help protect the value of your investment, especially when the market is choppy, with regular withdrawals.
Secondly, investors who want to plan their retirement income can do so with an SWP plan.It allows them to receive fixed income regularly on a fixed date to meet cash expenses.
SWP in mutual funds allows investors to customise their withdrawal plans. Individuals can receive a specified amount monthly, half-yearly, quarterly, or annually. You can withdraw only the appreciated amount with appreciation withdrawal while your principal amount remains invested to earn returns.
One important thing to understand is that SWP isn’t quite like a fixed deposit. With a fixed deposit, your principal amount remains unaffected by market fluctuations. But, for SWP in mutual funds, the NAV value fluctuates with the rise and fall in the market, impacting your investment’s final value. It also reduces by the number of units redeemed with every withdrawal.
Let’s say you have 10000 units in your mutual fund scheme, and you wish to withdraw Rs 5000 monthly. In the first month, if the NAV value is Rs 10, you need to redeem 500 units to receive Rs 5000. Your invested units get reduced by (10000-500) or 9500.
Now in the second month, let’s assume the NAV value increases to Rs 25, then you will have to redeem 200 units to get Rs 5000. So, after the second month, you will have (9500-200) or 9300 units in your mutual fund. Hence, with every withdrawal, the investment value will reduce, which will impact the final returns on investment.
Withdrawals from SWP are subject to taxation. The capital gain realised from investing in debt funds for less than 36 months will get added to the total income. If the investment period stretches over 3 years, a 20 percent capital gain tax will apply after indexation.
In the case of equity funds, a 15 percent short-term capital gain tax will apply for a holding period of less than a year. On the other hand, if you invest over a year, the applied tax rate is 10 percent without indexation.
• A systematic withdrawal plan allows investors to customise and create a second income stream from their mutual fund investment.
• Investors receive returns on a specific date either by a fixed amount or variable.