SWP: Systematic Withdrawal Plan

Every investor has varied financial needs and objectives. For example, while some may want capital gains, others seek regular dividends from their investments. Fund houses set up various facilities and instruments for the different needs of investors. This includes the facility of a Systematic Withdrawal Plan (SWP).


Continue reading to find out more about SWP. 



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What is Systematic Withdrawal Plan (SWP) in Mutual Funds?


An Systematic Withdrawal Plan (SWP) is a plan that permits an investor to take out money from an existing mutual fund scheme at predetermined periods. This helps investors to have a regular inflow of money. This is the usual route for existing investors to create a steady flow of income to fund their retirement accounts.


SWP is very beneficial to individuals who need liquidity as it permits investors to withdraw their money when they can use it at a predetermined date. This makes it convenient for investors to accomplish their financial objectives.


The obvious choice for investors who seek regular dividends from their investment is postal or fixed deposits in banks. Although, the constantly decreasing interest rate in these methods has made them more worried about their investment returns.  


This is where SWP is crucial. SWP gives investors the freedom to choose any date of the month, quarter, or year when withdrawals are permitted and are credited to the individual’s bank account by asset management companies. 


To create this cash flow, SWP redeems units of the scheme at a predetermined interval. Investors can continue with this until the mutual fund scheme has balance units. Withdrawals through SWP could be varied or fixed.


Since SWP allows an investor to promptly redeem investments from respective mutual fund schemes in installments rather than a lump sum, it is the opposite of SIP (Systematic investment plan)


For example, in SWP, investments are directed from a mutual fund scheme to an investor’s bank account, whereas in SIP, it is the opposite – funds from an investor’s bank account are invested in a scheme.


SWP lets you customize your withdrawals as per your financial goals. For example, an investor can choose to have just the capital returns or a predetermined amount.  An investor will have funds still invested in the mutual fund scheme, but they will also have regular cash flow.


Benefits & Advantages of SWP


Here are the benefits and advantages of SWP:


  • Regular cash flow:

SWP allows investors to choose any date of the month, quarter, or year when withdrawals are permitted and are credited to the individual’s bank account by asset management companies.


  • A viable option for a retirement plan:

Regular cash flow feature of SWP from an already existing investment makes it an excellent choice for your retirement.


  • Residual investment:

Even though regular withdrawals are made, the remnant amount is still invested, which increases the probability of a better return through capital appreciation.


  • Flexibility:

SWP lets you personalize your withdrawals according to your investment objectives. An investor can choose to have just the capital gains or a fixed amount, the withdrawal date, and even the frequency they please.


  • Capital gains:

An investor eventually gets capital appreciation if the SWP rate is lesser than the fund’s returns.


  • TDS not needed:

As long as the investor is a resident, no TDS is required on the SWP amount.


Types of SWP 


Here are the kinds of SWP:


  • Fixed amount SWP: 

In this type of SWP, a predetermined fixed amount is redeemed from the mutual fund scheme as per the withdrawal plan dates. 


  • Capital appreciation SWP:

In this type of SWP, any appreciation in the mutual fund scheme on the withdrawal plan date is redeemed from the fund periodically. 


Why should one use SWP?


Here are some salient reasons why you should use SWP: 


  • The second source of income:

Any investor familiar with SWP must be aware that it could be a second source of income in the long term, which can have inflation-beating benefits for the cost of living.


  • Capital protection:

Conservative investors who are not welcome or tolerant of risk can invest in mutual fund schemes and choose to only receive capital returns as SWP.


  • Create one’s pension:

Investors can create their pension fund by investing their retirement fund into mutual fund schemes suited to their risk profile and have a regular cash flow at a chosen frequency.


  • To save tax:

As mentioned earlier, since there is no TDS on the capital gains made through SWP, investors with a high tax bracket might find this helpful. 


Key Takeaways


To summarise, an investor can set up an SWP as per their financial needs and investment objectives which can then turn into a profitable investment and even a second stream of income. 


Though mutual funds are directly subject to market fluctuations, SWP can help investors withdraw according to their financial objectives. It ensures the availability of funds at the right time. 


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