Mutual funds are one of the most popular investment options for those looking for professional management, diversification, and higher returns on their investment.
Investors can achieve their financial goals by using a variety of strategies and tools that are available in online mutual fund investments.
The Systematic Withdrawal Plan (SWP) is one of them that provides a systematic way to generate regular income from mutual fund investments.
In this blog, We’ll explore what is SWP in mutual funds, how it works, its advantages, etc.
What is a Systematic Withdrawal Plan (SWP)?
A Systematic Withdrawal Plan (SWP) enables you to withdraw money from your mutual fund in a regular and planned manner.
Through SWP, you can decide how much money you want to withdraw at one time and how frequently you want to withdraw it.
Setting up a SWP instructs the AMC to credit a fixed or variable chunk of money to your bank account over regular intervals.
One of the greatest strengths of a SWP is that it offers a continuous flow of income.
It is particularly helpful for those people who are looking for a steady passive income from their investments, such as retirees or those on a sabbatical.
How SWPs Work
- You Invest in Mutual Funds: Choose a fund that fits your risk profile and financial goals
- You Choose a SWP: Setup the SWP from your mutual fund investing app
- You Set Instructions: Add the amount and frequency of withdrawals
- AMC Adheres to Instructions: Executes withdrawals as per the specified frequency and amount
- Money is Systematically Credited: On the date & time you’ve specified
Comparing SWP Vs SIP
| Feature | SIP | SWP |
| Purpose | Accumulate wealth | Generate regular income |
| Cash Flow | Invests money | Withdraws money |
| Goal | Long-term | Short-term or regular income |
| Frequency | Fixed or Flexible | Flexible |
| Taxation | Potential gains taxed | Withdrawals taxed |
| Market Timing | No timing required | No timing required |
| Returns | May vary | Potentially steady |
Who Should Choose a Systematic Withdrawal Plan(SWP)?
SWPs are a smart option for investors who are looking for flexibility and efficiency in their investment portfolios.
Most individuals can benefit from the exceptional capacity of SWPs to deliver consistent, tax-efficient income customized to meet specific financial needs.
Some major beneficiaries of SWP are mentioned below:
1. Retirees
SWP provides a simple way to manage liquidity and create a stable income that can finance the day-to-day expenses and hobbies of retired people.
2. Investors Seeking Regular Income
SWP is a good option for those individuals, who need regular income from their investment. It is mainly beneficial for those who want to earn something extra besides their salary.
3. Investors Seeking Capital Protection
SWP is a good option for those who are looking for a safe investment for their capital which also generates some profit.
4. High Tax Bracket Individuals
High-tax-bracket individuals can use SWP’s tax efficiency by adjusting the amounts they take out, resulting in lower tax liability for their investment income.
Advantages of Using a SWP for Mutual Funds
There are several advantages to investing in SWP. Some of them are discussed below.
1. Regular Income
SWP is especially helpful for retirees or anyone looking for additional income because it helps investors generate a steady stream of income from their mutual fund assets. This regular income helps the retirees to manage their living expenses.
2. Flexibility
Depending on their demands, investors can customize the withdrawal amount and frequency to meet their finances which can be monthly, quarterly, half-yearly, or annually, depending on their needs.
This flexibility allows investors to align their investments according to the evolving market and their needs.
3. Tax Efficiency
SWP withdrawals are eligible for tax advantages, which will reduce investors’ tax burden but it depends on the holding duration and kind of mutual fund (debt or equity).
In India, long-term capital gains (LTCG) from equity mutual funds are taxed at a lower rate compared to short-term capital gains (STCG).
4. Rupee Cost Averaging
While withdrawing funds, investors can use the SWP to apply rupee-cost averaging, which will reduce the effect of market volatility on their withdrawals.
When the market is volatile, withdrawing a fixed amount at regular intervals gives them an upper edge as they buy more units when prices are low and fewer units when prices are high.
What are the Disadvantages of SWP?
First off, SWPs are typically best suited for individuals who are looking to generate a source of income, as opposed to someone who already earns a salary or steady income.
Regardless of who’s opting for a SWP, there’s the problem of capital erosion. In simple words, more units of your mutual fund will be sold during falling markets to fulfill your SWP request. This works directly against future gains.
Then there’s the matter of flexibility. Yes, SWPs are flexible in that they allow you to modify the frequency and amount. But they’re not truly flexible when you need money for emergencies.
Thus, it’s important to balance SWP outflows with SIP inflows, or lump sum investments, if you want to get the best out future growth as well as regular income.
Conclusion
Mutual funds SWP provides investors with a practical and effective means of generating consistent returns on their capital.
SWP offers flexibility and tax efficiency to investors while assisting them in reaching their financial objectives through a controlled withdrawal process.
