Systematic Withdrawal Plan (SWP) is a kind of facility. Through this, investors get a fixed amount back from Mutual Fund Schemes. The investors themselves choose how much money to withdraw in what time frame.
Systematic Withdrawal Plan: How would it be if whatever you invest, you get regular income every month from it. Yes, you can also get regular income from your investment in Mutual Fund. For this, you have to invest in Systematic Withdrawal Plan. But, what is this SWP? How will it give you regular income? And when is doing SWP beneficial? Is this a better plan than SIP? We have tried to answer some such questions.
SWP: Systematic Withdrawal Plan
Systematic Withdrawal Plan (SWP) is a kind of facility. Through this, investors get a fixed amount back from Mutual Fund Schemes. Investors themselves choose how much money to withdraw in how much time. They can do this on a monthly or quarterly basis. However, the Monthly option (Regular Monthly Income) is more popular. If investors want, they can withdraw only a fixed amount or if they want, they can withdraw the capital gains on the investment.
How to start SWP?
SWP can be started at any time. It can be started as soon as the first investment is made. If you are investing in a scheme, you can activate the SWP option in it. It can be started at any time for the need of regular cash flow. To activate SWP, you have to fill an instruction slip in the AMC mentioning the folio number, frequency of withdrawal, date of first withdrawal, bank account receiving the money.
Understand the concept of SWP
Systematic Withdrawal Plan (SWP) works just like Systematic Investment Plan. Systematic Withdrawal Plan is a panacea for investors. In this, you can withdraw your money at regular intervals. This ensures that the investor has a cash flow and does not have to wait to withdraw long-term investments. There is no hassle of lock-in period.
SWP: Regular income every month
Money can be withdrawn at regular intervals through SWP. In this, you can decide when you need the money on monthly, quarterly and yearly basis. There is an option to withdraw money from the account every month on the basis of NAV. This money can be reinvested in MF or spent. SWP is specially designed for senior citizens. Senior citizens benefit more from it. They have to pay less tax on income.
It is important to understand this for SWP?
- From which fund do you want to run SWP?
- How much amount of SWP do you want?
- For how long do you want to run SWP?
- It is important to tell the fixed date of the month.
Find out before starting SWP
If your investment is in debt fund. You are getting 8% return. If you are withdrawing 10% annually, then in such a case you are spending capital. This can reduce your invested capital. Invest only the amount you need in debt fund in 5 years. Invest the extra amount in hybrid fund.
How does SWP work?
- It is important to tell the amount/date/period of your SWP.
- Every month money will go to your account.
- This money is received from the sale of units from your fund.
- If the money in the fund runs out, SWP will stop.
Difference between SWP and SIP?
- In SIP, a fixed amount is deducted from your account every month.
- The amount deducted from the account goes for investment in mutual fund.
- The amount fixed in SWP comes into your bank account.
- The amount of SWP comes from the sale of mutual fund units.
These precautions are important in SWP
- Never run SWP with equity mutual funds.
- If the market falls, your fund gets affected.
- You will have to sell more units for the fixed amount.
- By doing this, the portfolio will get exhausted very quickly.
- Debt/liquid funds are a better option for SWP.
Benefits of SWP
- Investors can choose the amount as per their need.
- Good returns expected by staying invested in the market.
- Good option to beat inflation.
- Can withstand fluctuations in the market.
- How much tax is levied on investment in SWP?
- STCG is levied on investment of less than 1 year in equity.
- STCG is levied on investment of less than 3 years in debt.
- If the profit in equity is more than Rs 1 lakh, then tax will be levied.
- Tax will be levied on redemption of equity mutual funds.
What to keep in mind?
- While doing SWP, you have to take care of your tax liability.
- Every withdrawal is considered as a redemption.
- In such a case, you have to pay capital gain tax on these.
- Capital gain is levied as per the fixed tax slab.
