Systematic Withdrawal Plans – Guide to SWP in Mutual Funds

Overview

Long-term investment said to be most rewarding, but no one talks about the vital part i.e. Compounding and Drawing Down. 

Let’s make a sense out of it.

Compounding helps your return on investment grow over time by multiplying it. On the flip side, if your savings are your investment, drawing down becomes significant for achieving your short-term goals. But it is never a good time to make room for your personal expenses, when it comes to the right investment. 

In the world of mutual fund investment, there is SWP (Systematic Withdrawal Plan) that allows investors to get a specific amount of money within a set period of time. 

But how does it help? 

Investors can either draw the interest without worrying about your Lump sum investment or compound overall funds to cover their expenses. 

But what exactly is the Systematic Withdrawal Plan, how does it work, and what are its benefits as well as limitations? Let’s unravel the insightful details without wasting any time.

What is SWP (Systematic Withdrawal Plan)

Think of it this way. You have invested a lump sum of money in a retirement account for your future. An SWP, or Systematic Withdrawal Plan is like getting a regular allowance for oneself from that investment. 

In technical terms, an SWP is a type of mutual fund facility that allows investors to withdraw a specific amount of money within a certain period of time. The time duration can differ from quarterly, monthly, or yearly. Moreover, investors can select their frequency as well as amount of withdrawal as per their convenience. 

The technique is best useful for people who are seeking income management, retirement planning, or harnessing the power of compound due to its disciplined behaviour. 

Key Takeaways of SWP (Systematic Withdrawal Plan)

Here we have listed few key features of SWP that define the definition in simplified way:

• It’s a disciplined approach to fetch parts of funds regularly (set duration of time)
• Investors can select time, frequency, and amount of capital for withdrawal. 
• You have the option to withdraw either a fixed amount or just the capital appreciation.
• The strategy is suitable for investors with strong compounding or seeks regular incomes. 

Benefits of SWP

Despite the perks of compounding and money withdrawal, here we have listed major benefits of SWP (Systematic Withdrawal Plans).

Regular Income: SWP resolves the issues of steady income stream, offering a certain amount for retirees or those seeking regular payouts from their investment. 

Flexibility: Investors get the flexibility to pick the withdrawal frequency (quarterly, monthly, or annually) and the amount. Investors also get a free hand at stopping their investment at any time or adding further capital above the specific SWP withdrawal. 

Taxation: Based on the type of investment account and tax circumstance, SWP investors can avail tax relaxation benefits. If one chooses to opt out for an SWP, investors get relief on the tax deducted at source. However, capital gains tax will be applied according to the withdrawal amount and mutual fund type. Here is a brief overview at the capital gains tax applied on different types of mutual funds:

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: For investors who focus on withdrawing a specific amount, SWP can help in averaging out the impact of market fluctuations. To gain good profit, it is super important to redeem units during the uptrend of the market. Markets do not always remain in an upward or downward trend, hence if you redeem your units during the good market time, it can potentially minimise the risk of selling during the market downturns. 

Convenience: SWP sets the fixed amount of redemption within a fixed period of time, automating the complete process, making it easy for investors to receive regular payout without any fuss. 

Limitations of SWP

Let’s study few limitations of Systematic Withdrawal Plans (SWP) consists of:

Market Risk: Aforesaid during the rupee averaging, during the selling of units for withdrawals, SWP is exposed to market risks. If the investors square off and place withdrawals during the downturn, it can cause loss in the investment. 

Timing Risk: The timing is vital when considering SWP. If the redemption is opted out when the market is down, it can lock in losses. After all, if it’s not profitable, it is a loss-loss deal.

Tax Implications: Although if the market is up during the time of SWP withdrawal, investors can reap several benefits. However, as per the nature of investment and holding period, withdrawals may attract capital gains tax that can cause loss in overall net returns. 

Inflation Risk: If, in case, the withdrawal amount does not keep up with the inflation, the withdrawal amount may lose its value over time. 

Fund Selection Risk: Selecting the right mutual fund for Systematic Withdrawal Planning is super important. Investing in a fund with low returns or high expenses can affect the success of the SWP strategy.

Perks and Setbacks of Systematic Withdrawal Plan (SWP)

Here let’s make a comparison between both benefits and limitations of SWP in simplified way:

Factors	Benefits of SWP	Limitations of SWP
Market Risk	Provides regular income	Exposure to market fluctuations can impact corpus
Timing Risk	Allows flexibility in withdrawals	Poor timing of withdrawals can lock in losses
Impact on Returns	Enables customization of withdrawal frequency and amount	Regular withdrawals may reduce overall returns
Tax Implications	Tax-efficient compared to other income sources	Withdrawals may attract capital gains tax
Inflation Risk	Offers potential for inflation-adjusted income	Failure to adjust withdrawal amount for inflation can erode purchasing power
Fund Selection	Can be used to manage cash flow efficiently	Choosing the wrong fund can impact returns and effectiveness of SWP

How does SWP Mutual Fund work?

Systematic Withdrawal Plan, also abbreviated as SWP, is a feature offered by mutual funds that helps investors reap their interests on their invested amount via offering a choice of withdrawing specific amounts. Investors can easily select the time, frequency, and amount of withdrawal as per their needs, keeping it as a secondary source of income.

Here we have listed step-by-step guide on how SW mutual fund works:

• The investors research and select a mutual fund.
• In the next phase, open an account with the fund house, broker, or demat account.
• Start with investing a lump sum amount  in a mutual fund scheme and specify the amount of withdrawals along with other components such as frequency (annually, monthly or quarterly).
• The plan will withdraw a fixed number of units from your investment periodically, as per your plan selection. 
• The redeemed amount is transferred to your bank account.
• With every withdrawal, the remaining amount stays invested in the mutual fund scheme. 

The mutual fund will keep selling some of your investment units regularly to give you the money you want, until you stop the withdrawals or you run out of money in your investment.

In A Nutshell

Systematic Withdrawal Plan or SWP is a very handy and useful tool for mutual term investment, especially if you’re looking for a constant income source or strong source of compounding. Whether you are an experienced investor or amateur trader, investing in SWP is like keeping a retirement plan, useful when you have nothing in hand. Majorly there are no risks associated per se with SWPs, however with the underlying fund, there are few risks included.