What is SWP in Mutual Funds – Key Features and Benefits

SWP

You’ve probably heard of Systematic Investment Plans (SIPs) – a Systematic way to grow in wealth by consistently investing fixed amount over time. SIP s been one of the best way to invest your money and you can have visibility of your investment as well along with that it is easy to withdraw. But what happens when you’ve accumulated a sizable amount and would like to withdraw systematically? That’s where Systematic Withdrawal Plans (SWP) comes into picture. 

In this blog, we will talk about what SWP in Mutual fund means, the best mutual funds for SWP, how to invest, benefits, taxation, and more.

What is a SWP in Mutual Funds?

A Systematic Withdrawal Plan or SWP is a facility extended to investors allowing them to withdraw a fixed amount from a mutual fund scheme regularly. You can choose the amount and frequency of withdrawal. You can also choose to just withdraw the gains on your investment keeping your invested capital intact. At the set date, units from your portfolio are sold and the funds are transferred to your account.

How does SWP work?

Let’s break down a systematic withdrawal plan in simpler terms, step by step:

• Pick a mutual fund – First, you choose a mutual fund to invest in. This is like choosing a savings jar where you want to put your money.
• Open an account – You need to open an account with the mutual fund company, similar to opening a bank account.
• Decide how to invest – You decide whether you want to put money into this fund all at once (lump sum) or bit by bit over time (SIP).
• Set up SWP – You then tell the mutual fund company that you want to withdraw a fixed amount of money regularly (monthly, quarterly, etc.). This is like setting up a plan to take out a certain amount from your savings jar at regular times.
• Withdraw money – When the date you picked for withdrawal arrives, the mutual fund company takes out the amount you wanted. They do this by selling a part of your mutual fund, which means they convert some of your investments into cash.
• Money to bank account – The money from the sale is then transferred to your bank account, just like someone putting cash from the savings jar into your wallet.
• Continue the process – This process keeps happening at the intervals you chose (every month, every three months, etc.) until you stop it or your investment runs out.
• Earning returns – Meanwhile, the money that remains in the mutual fund continues to grow (or shrink) based on how well the investments are doing. Over time, as you keep taking money out, the total amount left in your fund decreases.

Benefits of a Systematic Withdrawal Plan (SWP)

There are several benefits of using an SWP as a way to generate income from your savings.

Regular and predictable income

An SWP allows you to withdraw a fixed amount of money at regular intervals, providing you with a reliable stream of income to support your expenses. This can help you plan and budget more effectively.

Flexibility

You can choose the withdrawal amount and frequency that suits your needs. For example, you can set up an SWP to withdraw monthly, quarterly, or even annually.

Tax benefits

Investors are not required to pay any tax deducted at source (TDS) on the funds received through an SWP

Who Should Consider SWP?

SWP are useful for those who want a regular income stream from their investments. One might say that opting for IDCW (income distribution cum capital withdrawal) plans of mutual funds (earlier called dividend plans) could also be a solution. These plans have payouts from time to time. However, IDCW plans may not be the right option as the declaration of the payouts is at the discretion of the fund house. So, they are not predictable like SWP. 

SWP can also be useful for those who want to maintain a disciplined approach to withdrawing money from their savings. By setting up a fixed withdrawal amount, they can ensure that they don’t overspend or withdraw too much from their savings.

Difference Between SIP and SWP

Let’s look at the difference between SIP and SWP. 

How Does an SWP Work?

In case of a Systematic Investment Plan (SIP), you need to invest a fixed amount periodically. However, in an SWP, you are allowed to withdraw funds regularly. As you make withdrawals, the number of units in the mutual fund scheme decrease.

Let’s take a look at an example to understand how an SWP works-

Mrs. Patel wants to make systematic withdrawals from her mutual fund scheme. She holds 10,000 units in this fund. She wants to withdraw Rs. 5,000 on a monthly basis.

The NAV at the time of first withdrawal is Rs. 10. Therefore, the number of units that will be sold are-

5000/10= 500

Thus, the remaining units after this withdrawal will be 9,500 (10,000-500).

At the next withdrawal, if the NAV goes to Rs. 15, then the number of units to be sold will change.

5000/15= 333

The NAV at the time of withdrawal has a huge impact on the number of units held in a scheme. If the NAV goes down, then the number of units to be sold will increase.

Conclusion

Overall, an SWP can be a powerful tool for generating income from your savings, especially if you are retired or are no longer working and hence rely on your savings to support your expenses. You can speak with your financial advisor to assess its suitability in your case.

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DISCLAIMER

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product.