There are multiple ways mutual fund investors can withdraw money from their investments. Not only can you redeem units of the mutual fund, but you can also choose to get a regular stream of income. A Systematic Withdrawal Plan, or SWP in short, lets you withdraw a fixed amount as a monthly payout.
Now let us understand how SWPs work and how to find the best SWP plans in India for 2022.
What Is a Systematic Withdrawal Plan (SWP)?
SWP is a way to withdraw money from your mutual fund investments in instalments. It involves investing in a mutual fund scheme by setting up a withdrawal plan.
You can set the interval as weekly, monthly, or quarterly, and you will receive a payout on a specific date.
Investors generally tend to select a mutual fund scheme with low risks for an SWP. It can include liquid funds, ultra short-term funds, or other debt funds. Investors with high-risk appetites can also invest in equity funds like significant cap funds.
To set up an SWP for a mutual fund, you can invest in a low-risk growth scheme and specify the withdrawal amount, date, and interval. Units worth the fixed amount that redeems on designated dates, and then money gets credited to your linked bank account.
For example, let’s say you have an investment worth Rs. 15 lakh, and you set up an SWP to withdraw Rs. 20,000 on the 5th of every month. Thus, you can redeem Rs. 20,000 worth of fund units on the 5th of every month.
SWPs allow you to customize the cash flow from your matured investments. You can withdraw only the capital gains from your mutual funds or a fixed income. You will have a part of the money invested in your preferred scheme while withdrawing the amount you need.
Why Would You Need a Systematic Withdrawal Plan?
The following are some of the essential benefits of opting for an SWP:
- For a stable source of income
SWP in a mutual fund will help you get an additional source of income. These days, a secondary source of income is necessary to cover the rising cost of living. If you are a retired individual seeking additional income, you can use an SWP to meet your regular expenses.
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- To create your pension, even if you do not have a pension, you can invest in a mutual fund scheme to create your pension. After retiring, you can use an SWP to make withdrawals from your investment to get a fixed income.
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- After retiring, you can use an SWP to make withdrawals from your investment to get a fixed income. You can also use this method to supplement your existing pension.
- To book profits systematically
After years of investing, you will want to book your profits to fulfill your life’s goals. Instead of withdrawing the entire lump sum, you can gradually choose a systematic withdrawal plan to withdraw money as per your needs. It will allow you to draw other returns from the remaining amount.
- Disciplined withdrawals
When setting up an SWP, you will issue standing instructions to the mutual fund house to transfer a pre-determined amount on a specific date. It will ensure regular and disciplined withdrawals, which prevents capital erosion.
- Rupee cost averaging
When you redeem or purchase mutual fund units. Market volatility plays a vital role in deciding your returns. If you redeem a large sum of money, the market takes a sudden downturn.
However, when you opt for an SWP, rupee cost averaging comes into play. Fewer units will be redeemed on days when the markets are high, while more units will be redeemed when it is low. Over time, this will average the number of units redeemed, resulting in minimal losses.
How to Pick the Best SWP Plans?
Picking the best SWP funds is not different from choosing any other mutual fund. You select a mutual fund to invest in and withdraw funds after a point. So, you should check the following factors to see if the mutual fund suits your investment needs:
- Your investment goals
You will want to plan out your financial goals before investing in a mutual fund scheme. Your choice of mutual fund will depend on what your requirement is. For example, you might choose a fund for building a retirement corpus, creating an emergency fund, etc. If you want to park your money to get stable returns, debt funds could be the right option.
- Investment horizon
Along with investment goals, you will also want to check the investment horizon of a mutual fund. If you have long-term goals, you might want to focus on growth-oriented mutual funds as you would have enough time to adjust for market volatility.
On the other hand, you can consider choosing low-risk funds if you have a short-term goal. This would allow you to start a Systematic Withdrawal Plan (SIP) when you need the money.
- Risk assessment
Understanding the risks of losses is crucial for any investment. You will want to know your risk tolerance level to see if it matches the mutual fund’s risks. Risks and returns are always proportional, so choosing the best SWP plans will depend on your risk appetite and financial needs.
Equity mutual funds suit aggressive investors who prefer a high risk and high reward approach. However, those who prefer stable returns and cannot bear losses may want to go for debt funds.
- The expense ratio
Every AMC charges an annual fee called the expense ratio for the management, administration, promotion, and distribution of a mutual fund scheme. The expense ratio can vary depending on whether a fund is actively or passively managed, its AUM (Assets under Management), and the fund house. It would help if you chose a scheme with a low expense ratio as it will affect your returns.
Best Performing Systematic Withdrawal Plans in 2022
The following are the best mutual funds for SWP in India. These lists are based on their 3-year annualized returns as of May 17, 2022:
- Equity funds
| Name of the Mutual Fund | Fund Category | 3-Year Annualised Returns |
| Quant Tax Plan- Direct Plan- Growth | ELSS | 40.7% |
| BOI AXA Small Cap Fund- Direct Plan- Growth | Small cap fund | 39.8% |
| PGIM India Midcap Opportunities Fund- Direct Plan- Growth | Mid cap fund | 38.4% |
| Quant Mid Cap Fund- Direct Plan- Growth | Mid cap fund | 37.1% |
| Quant Active Fund- Direct Plan- Growth | Multi cap fund | 36.3% |
- Hybrid funds
| Name of the Mutual Fund | Fund Category | 3-Year Annualised Returns |
| Quant Multi Asset Fund- Direct Plan- Growth | Multi asset allocation | 31.1% |
| Quant Absolute Fund- Direct Plan- Growth | Aggressive hybrid fund | 31.1% |
| BOI AXA Mid and Small Cap Equity and Debt Fund- Direct Plan- Growth | Aggressive hybrid fund | 24,7% |
| ICICI Prudential Equity & Debt Fund- Direct Plan- Growth | Aggressive hybrid fund | 20.4% |
| ICICI Prudential Multi-Asset Fund- Direct Plan- Growth | Multi asset allocation | 19.29% |
- Debt funds
| Name of the Mutual Fund | Fund Category | 3-Year Annualised Returns |
| HDFC FMP 1846D August 2013 (1) (27)- Direct Plan- Growth | Fixed Maturity Plans (FMP) | 9.64% |
| Nippon India Fixed Horizon Fund 40- Series 16- Direct Plan- Growth | Fixed Maturity Plan | 9.08% |
| Edelweiss Government Securities Fund- Direct Plan- Growth | Gilt Fund | 7% |
| UTI Fixed Term Income Fund- Series XXXI- Plan II- (1222 days)- Direct Plan- Growth | Fixed Maturity Plan | 8.67% |
| SBI Magnum Gilt Fund- Direct Plan-Growth | Fixed Maturity Plan | 6.8% |
And Also Read: 5 Reasons Why Long Term Investments in Stocks are Healthy?
Final Word
Systematic Withdrawal Plan are a great alternative to lump sum withdrawals. You can use them to get a regular income to meet your financial needs. Meanwhile, the rest of your investment generates returns based on the prevailing market conditions.
Frequently Asked Questions
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How are returns from SWPs taxed?
Unlike investments like FDs and postal savings, TDS (Tax Deducted at Source) is not applicable on an SWP. Capital gains from Systematic Withdrawal Plan’s are subject to the following taxes:
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- Short Term Capital Gains (STCG) tax: For equity funds, STCG tax is applicable at 15%. STCG from non-equity funds is taxed as per your respective income tax slab.
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- Long Term Capital Gains (LTCG) tax: In the case of equity funds, LTCG is taxed at 10%, but gains of up to Rs. 1 lakh are tax-exempt. LTCG earned from non-equity funds are taxed at 20% and indexation benefit.
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What are the different options of SWPs available in India?
There are mainly two options of Systematic Withdrawal Plan available in India. These are as follows:
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- Fixed periodic withdrawal: In this option, you can withdraw a pre-determined amount at regular intervals (monthly, quarterly, bi-annually or annually).
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- Appreciation withdrawal: You can use this option to withdraw only the capital gains from your investment. This lets you keep the principal amount invested while getting regular income.
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When is the right time to start an SWP?
If you have a significant lump sum amount, you may consider starting an SWP as soon as you invest the entire sum. For equity schemes, you will want to wait for at least a year after investment to avoid paying STCG (Short Term Capital Gains) tax.
To have a sizeable amount of regular cash flows, you can consider investing for several years (say 5 to 7 years) for capital appreciation. You can also opt for an SWP after the end of your SIP investments to stay invested.
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What is the difference between SIP and SWP for mutual funds?
A Systematic Investment Plan (SIP) is the exact opposite of a Systematic Withdrawal Plan (SWP). In SIPs, you invest money from your bank account into a mutual fund scheme at fixed intervals. On the other hand, in the case of SIPs, the money is credited to your bank account from a mutual fund at fixed intervals.
The purpose of a SIP is to regularly invest small sums of money to grow your wealth. In contrast, SWPs allow you to flexibly withdraw your investments in installments.
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Who can benefit by opting for an SWP?
The following investors can consider opting for an SWP:
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- Risk averse investors can use SWPs for capital protection
- Investors looking to create an additional source of income
- Retired investors who want to create their own pension
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How to use SWP Calculator?
In the Systematic Withdrawal Plan (SWP), an individual needs to invest a particular amount and withdraw a certain amount of the corpus invested in each month. After withdrawal, the amount will be deducted from the investment while it continues to accumulate interest.
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