All you wanted to know about Systematic Withdrawal Plan

What is a Systematic Withdrawal Plan (SWP)?

A Systematic Withdrawal Plan (SWP) is a facility that allows an investor to withdraw money from an existing mutual fund at predetermined intervals. The money withdrawn from a systematic withdrawal plan can be reinvested in another portfolio or it can be used as a source of regular income from their investments.

Systematic withdrawal plans (SWPs) are, in a way, the reverse of SIPs. In an SWP, instead of putting money in the fund, the investor redeems a fixed amount from his investment on a predetermined date and period.

What are the types of SWPs?

Under SWP, withdrawals can be fixed or variable amounts at regular intervals. These withdrawals can be made on a monthly, quarterly, semi-annual or annual schedule. The holder of the plan may choose withdrawal intervals based on his or her financial commitments and needs. SWP is usually available in two options:

Fixed Withdrawal: Under this you specify amount you wish to withdraw from your investment on chosen basis (annual, monthly, etc).

Appreciation Withdrawal: Under this you can withdraw the appreciated amount on your investment and enjoy the gains on your money.

The Process

Let’s understand this process with the help of an example; lets say you have 5,000 units in a Mutual Fund scheme. You have given instructions to the fund house that you want to withdraw INR 8,000 every month through SWP.

Now let’s assume that on December 25, the Net Asset Value (NAV) of the scheme is INR 20.

Equivalent number of MF units = INR 8,000 / INR 20 = 400

400 units would be redeemed from your MF holdings, and INR 8,000 would be given to you.

Your remaining units = 5,000 — 400 = 4600

Now say, on January 25, the NAV is INR 16.

Equivalent number of units = Rs. 8,000 / INR 16 = 500

500 units would be redeemed from your MF holdings, and INR 8,000 would be given to you.

Your remaining units = 4600 — 500 = 4100

In this way, units from your mutual fund holdings are redeemed in a systematic way to provide you with continuous income.

What makes SWP a Wise Strategy?

Regular Income

SWP is good way to get a fixed amount of money periodically. Systematic withdrawal plans is of advantage to investors who require liquidity as it allows account holders to access their money exactly when they need it.

SWP can be set up to withdraw only the appreciation made on a particular investment. In this way your capital stays invested while you continue to enjoy the gains periodically.

Tax Benefit

SWPs score over dividend option in case of debt mutual funds because they incur a lower tax. The so-called tax free dividend the investors receive from any debt-oriented fund comes to them after a deduction of Dividend Distribution Tax (DDT). The DDT rate ranges from 12.5% in case of balanced and debt funds to 25% in case of liquid or money market funds. The only way to avoid DDT in a debt fund is to go for a cumulative option and start an SWP of the amount that is needed by the investor every month.