Learn More about What Is SWP in Mutual Funds
Posted on 21-Mar-2024
6 min read
Unlock the benefits of SWP in mutual funds with Shriram AMC in this blog. Find how they can optimise your portfolio and provide long-term financial stability.
Table of Content
Investors have unique financial needs, leading to personalized investment plans such as lump sum investments or Systematic Investment Plans (SIPs). While some seek capital growth, others desire regular income. Fund houses offer diverse tools, including Systematic Withdrawal Plans (SWPs), to accommodate these preferences.
SWPs allow systematic withdrawals from mutual fund investments, akin to SIPs but focused on withdrawals rather than investments. They are a valuable but lesser-known tool in the mutual fund realm, offering systematic withdrawal strategies and potential tax benefits. Read on as we explore all about SWP in mutual funds.
A Systematic Withdrawal Plan (SWP) is an option offered to investors, enabling them to regularly withdraw a predetermined amount from a mutual fund scheme. You have the flexibility to select the withdrawal amount and frequency. Additionally, you can opt to withdraw only the gains on your investment, preserving your invested capital. On the specified date, units from your portfolio are sold, and the proceeds are transferred to your account.
Here is who can opt for SWP in mutual funds:
Individuals seeking a consistent source of supplementary income
Investors familiar with the SWP plan understand its potential to generate an additional income stream from long-term investments. This method can help mitigate the impact of increasing living costs. Consequently, committing to long-term investments in mutual funds and systematically withdrawing funds through SWP may offer a straightforward means of establishing a steady source of secondary income.
Individuals prioritizing capital protection
Risk-averse investors can opt for moderate or low-risk profile mutual fund schemes, receiving only the capital gains through SWP. For example, the initial investment remains nearly risk-free, providing a secure approach to capital protection.
Individuals aiming to build their own pension
Investors without pension income can construct their own pension plan by investing their retirement corpus in schemes aligned with their risk tolerance. This allows them to receive a regular income at a frequency of their choosing. Therefore, upon retirement, initiating an SWP enables investors to create their personalized pension plan.
Individuals in a higher tax bracket
Investors in higher tax brackets find SWP advantageous due to the absence of TDS on capital gains. Moreover, the taxation of capital gains from equity/equity-oriented funds is moderate, and gains from debt-oriented funds are also manageable as indexation is permitted on long-term capital gains.
Key Features of SWP in Mutual Funds
Systematic Withdrawal Plans (SWP) in mutual funds provide various features, making them a versatile choice for investors:
Tailored Withdrawals: SWP allows investors to customize their withdrawal amounts and intervals, providing flexibility in managing income streams.
Rupee-Cost Averaging: Regular withdrawals through SWP help mitigate market volatility, preventing significant withdrawals during market downturns.
Cash Flow Management: Particularly advantageous for retirees, SWP offers a steady and predictable income source, crucial for budgeting and financial stability.
Investment Discipline: A fixed withdrawal amount helps maintain investment discipline, avoiding impulsive large withdrawals and preserving the investment corpus.
Adaptability to Financial Changes: The flexibility of SWP plans allows adjustments in withdrawal amounts or pausing withdrawals to adapt to changing financial situations.
Explore the advantages of a Systematic Withdrawal Plan in mutual funds:
Tax Saving Benefit
For investors seeking regular income, the Dividend option or an SWP is beneficial. With the Dividend option, the fund house deducts a 10% Dividend Distribution Tax (DDT) at the source. No additional tax is levied on the received dividend. Alternatively, with an SWP, no tax is deducted at the source. However, capital gains tax applies based on the scheme type and withdrawal amount. Here's a brief overview of capital gains tax for various mutual fund types.
Rupee-Cost Averaging
Whether you are buying or redeeming units in increments, Rupee Cost Averaging works in your favour. In volatile markets, redeeming all your units at once requires precise timing during favorable market conditions to secure good profits. Selling during a market slump can impact your profits.
With an SWP, a fixed number of your held units are regularly redeemed. This means there are times when redemptions occur in both high and low market conditions. Opting for an SWP during favourable market phases results in fewer units being redeemed compared to times when the market is low.
Beneficial During a Bull Market
In a bull market, most investments yield high returns. If you've chosen an SWP and your yearly withdrawal is less than the scheme's generated returns, your investment will endure longer than in a bear market. Additionally, by withdrawing profits during the bullish phase, you can secure these gains for yourself.
Effective Uses of SWP
Given below are some of these effective strategies for leveraging an SWP:
Establishing a Consistent Stream of Additional Income
In the contemporary landscape, having an extra income source is crucial to navigate the escalating cost of living. Engaging in mutual funds and utilizing SWP for withdrawals presents an excellent method to generate a steady secondary income.
Crafting Your Personalized Pension
Irrespective of whether you have an existing pension plan, creating a fund approximately five years before retirement and investing it in a mutual fund scheme aligned with your risk tolerance can be a prudent move. Upon retirement, initiating an SWP allows you to fashion your own pension.
Safeguarding Your Capital
If you are inherently averse to investment risks, consider initially investing in arbitrage mutual fund schemes. These schemes provide guaranteed returns with minimal risk. Opting for the dividend option and directing dividends into a debt scheme through a SIP can be a viable approach. Gradually transitioning to an SWP enables you to secure regular income without jeopardizing your capital.
Situations When SWP Might Not Be Favourable
Here are instances when an SWP might not be advantageous:
• Short-Term Investment Horizon: If an investor prefers a short-term outlook, SWP may not be ideal. Frequent withdrawals could outweigh the benefits, hindering the ability to capitalize on the market's long-term potential.
• Insufficient Fund Value: For those with a limited investment amount and a small mutual fund corpus, initiating an SWP might deplete the fund rapidly, leaving minimal room for capital appreciation.
• Rising Expense Scenario: In situations of anticipated significant expenses, such as a child's overseas education, relying solely on SWP with its fixed withdrawal nature might prove inadequate.
Conversely, gains from holdings exceeding 36 months are treated as long-term and subject to taxation based on your income tax slab.
For equity mutual funds, gains on investments held for less than a year attract a 15% tax. On the other hand, gains from investments held for over a year are considered long-term capital gains and taxed at a 10% rate without the benefit of indexation.
With its flexibility, SWP suits individuals seeking supplementary income, capital protection, or a personalized pension plan. Additionally, it offers tax benefits and aids in managing market volatility through Rupee-Cost Averaging. However, careful consideration is necessary, as SWP may not be favourable for short-term investors, those with insufficient fund value, or during rising expense scenarios.
Understanding its tax implications is vital for maximizing its benefits and aligning with long-term financial goals.
1. How does SWP differ from regular income sources like pensions or salaries?
Unlike fixed pensions or salaries, SWP offers flexibility in both the amount and frequency of income. It's based on your investment and can be adjusted according to changing financial needs, making it a dynamic income source.
2. Can SWP be used as a tool for specific financial goals, like education or home renovation?
Absolutely. SWP can be strategically set up to align with specific financial objectives. For instance, you can schedule withdrawals to coincide with major expenses like tuition fees or home improvement costs, ensuring you have the funds when needed.
3. How does SWP impact the longevity of my investment portfolio?
SWP, when used wisely, can help extend the lifespan of your investment portfolio. By withdrawing only what you need, your remaining investment grows potentially, allowing for a more sustained income over a longer period.
4. Is there a minimum investment amount required to start an SWP?
This can vary depending on the mutual fund house. Typically, to initiate the SWP facility, the minimum account balance or the minimum investment should be Rs. 25,000.
5. Can I pause or stop my SWP if my financial situation changes?
Most SWP plans offer the flexibility to pause or stop withdrawals. This feature is particularly useful if you experience a change in your financial circumstances or if you wish to adjust your strategy based on market conditions.
SWPs allow systematic withdrawals from mutual fund investments, akin to SIPs but focused on withdrawals rather than investments. They are a valuable but lesser-known tool in the mutual fund realm, offering systematic withdrawal strategies and potential tax benefits. Read on as we explore all about SWP in mutual funds.
What is an SWP?
A Systematic Withdrawal Plan (SWP) is an option offered to investors, enabling them to regularly withdraw a predetermined amount from a mutual fund scheme. You have the flexibility to select the withdrawal amount and frequency. Additionally, you can opt to withdraw only the gains on your investment, preserving your invested capital. On the specified date, units from your portfolio are sold, and the proceeds are transferred to your account.
Who Can Use SWP?
Here is who can opt for SWP in mutual funds:
Individuals seeking a consistent source of supplementary income
Investors familiar with the SWP plan understand its potential to generate an additional income stream from long-term investments. This method can help mitigate the impact of increasing living costs. Consequently, committing to long-term investments in mutual funds and systematically withdrawing funds through SWP may offer a straightforward means of establishing a steady source of secondary income.
Individuals prioritizing capital protection
Risk-averse investors can opt for moderate or low-risk profile mutual fund schemes, receiving only the capital gains through SWP. For example, the initial investment remains nearly risk-free, providing a secure approach to capital protection.
Individuals aiming to build their own pension
Investors without pension income can construct their own pension plan by investing their retirement corpus in schemes aligned with their risk tolerance. This allows them to receive a regular income at a frequency of their choosing. Therefore, upon retirement, initiating an SWP enables investors to create their personalized pension plan.
Individuals in a higher tax bracket
Investors in higher tax brackets find SWP advantageous due to the absence of TDS on capital gains. Moreover, the taxation of capital gains from equity/equity-oriented funds is moderate, and gains from debt-oriented funds are also manageable as indexation is permitted on long-term capital gains.
Key Features of SWP in Mutual Funds
Systematic Withdrawal Plans (SWP) in mutual funds provide various features, making them a versatile choice for investors:
Tailored Withdrawals: SWP allows investors to customize their withdrawal amounts and intervals, providing flexibility in managing income streams.
Rupee-Cost Averaging: Regular withdrawals through SWP help mitigate market volatility, preventing significant withdrawals during market downturns.
Cash Flow Management: Particularly advantageous for retirees, SWP offers a steady and predictable income source, crucial for budgeting and financial stability.
Investment Discipline: A fixed withdrawal amount helps maintain investment discipline, avoiding impulsive large withdrawals and preserving the investment corpus.
Adaptability to Financial Changes: The flexibility of SWP plans allows adjustments in withdrawal amounts or pausing withdrawals to adapt to changing financial situations.
Benefits of SWP in Mutual Funds
Explore the advantages of a Systematic Withdrawal Plan in mutual funds:
Tax Saving Benefit
For investors seeking regular income, the Dividend option or an SWP is beneficial. With the Dividend option, the fund house deducts a 10% Dividend Distribution Tax (DDT) at the source. No additional tax is levied on the received dividend. Alternatively, with an SWP, no tax is deducted at the source. However, capital gains tax applies based on the scheme type and withdrawal amount. Here's a brief overview of capital gains tax for various mutual fund types.
| Type | Short-term capital gains tax | Long-term capital gains tax |
| Equity mutual funds | 15% | 10% without indexation |
| Balanced mutual funds | 15% | 10% without indexation |
| Debt mutual funds | As per tax slab | 20% after indexation |
Rupee-Cost Averaging
Whether you are buying or redeeming units in increments, Rupee Cost Averaging works in your favour. In volatile markets, redeeming all your units at once requires precise timing during favorable market conditions to secure good profits. Selling during a market slump can impact your profits.
With an SWP, a fixed number of your held units are regularly redeemed. This means there are times when redemptions occur in both high and low market conditions. Opting for an SWP during favourable market phases results in fewer units being redeemed compared to times when the market is low.
Beneficial During a Bull Market
In a bull market, most investments yield high returns. If you've chosen an SWP and your yearly withdrawal is less than the scheme's generated returns, your investment will endure longer than in a bear market. Additionally, by withdrawing profits during the bullish phase, you can secure these gains for yourself.
Effective Uses of SWP
Given below are some of these effective strategies for leveraging an SWP:
Establishing a Consistent Stream of Additional Income
In the contemporary landscape, having an extra income source is crucial to navigate the escalating cost of living. Engaging in mutual funds and utilizing SWP for withdrawals presents an excellent method to generate a steady secondary income.
Crafting Your Personalized Pension
Irrespective of whether you have an existing pension plan, creating a fund approximately five years before retirement and investing it in a mutual fund scheme aligned with your risk tolerance can be a prudent move. Upon retirement, initiating an SWP allows you to fashion your own pension.
Safeguarding Your Capital
If you are inherently averse to investment risks, consider initially investing in arbitrage mutual fund schemes. These schemes provide guaranteed returns with minimal risk. Opting for the dividend option and directing dividends into a debt scheme through a SIP can be a viable approach. Gradually transitioning to an SWP enables you to secure regular income without jeopardizing your capital.
Situations When SWP Might Not Be Favourable
Here are instances when an SWP might not be advantageous:
• Short-Term Investment Horizon: If an investor prefers a short-term outlook, SWP may not be ideal. Frequent withdrawals could outweigh the benefits, hindering the ability to capitalize on the market's long-term potential.
• Insufficient Fund Value: For those with a limited investment amount and a small mutual fund corpus, initiating an SWP might deplete the fund rapidly, leaving minimal room for capital appreciation.
• Rising Expense Scenario: In situations of anticipated significant expenses, such as a child's overseas education, relying solely on SWP with its fixed withdrawal nature might prove inadequate.
Tax Implications of SWPs
When you opt for an SWP to redeem your investments, it's crucial to consider the associated tax implications. For debt mutual funds, any capital gains from holdings held for less than 36 months are added to your overall income and taxed according to your applicable income tax bracket.Conversely, gains from holdings exceeding 36 months are treated as long-term and subject to taxation based on your income tax slab.
For equity mutual funds, gains on investments held for less than a year attract a 15% tax. On the other hand, gains from investments held for over a year are considered long-term capital gains and taxed at a 10% rate without the benefit of indexation.
Conclusion
In conclusion, SWP in Mutual Funds stands as a versatile tool catering to diverse investor needs. It provides a structured approach to withdrawals, ensuring steady income streams while preserving capital.With its flexibility, SWP suits individuals seeking supplementary income, capital protection, or a personalized pension plan. Additionally, it offers tax benefits and aids in managing market volatility through Rupee-Cost Averaging. However, careful consideration is necessary, as SWP may not be favourable for short-term investors, those with insufficient fund value, or during rising expense scenarios.
Understanding its tax implications is vital for maximizing its benefits and aligning with long-term financial goals.
FAQs
1. How does SWP differ from regular income sources like pensions or salaries?
Unlike fixed pensions or salaries, SWP offers flexibility in both the amount and frequency of income. It's based on your investment and can be adjusted according to changing financial needs, making it a dynamic income source.
2. Can SWP be used as a tool for specific financial goals, like education or home renovation?
Absolutely. SWP can be strategically set up to align with specific financial objectives. For instance, you can schedule withdrawals to coincide with major expenses like tuition fees or home improvement costs, ensuring you have the funds when needed.
3. How does SWP impact the longevity of my investment portfolio?
SWP, when used wisely, can help extend the lifespan of your investment portfolio. By withdrawing only what you need, your remaining investment grows potentially, allowing for a more sustained income over a longer period.
4. Is there a minimum investment amount required to start an SWP?
This can vary depending on the mutual fund house. Typically, to initiate the SWP facility, the minimum account balance or the minimum investment should be Rs. 25,000.
5. Can I pause or stop my SWP if my financial situation changes?
Most SWP plans offer the flexibility to pause or stop withdrawals. This feature is particularly useful if you experience a change in your financial circumstances or if you wish to adjust your strategy based on market conditions.
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