We have already learned about Systematic Investment Plan (SIP), where investor can invest there money in mutual funds in a systematic way.
Systematic Withdrawal Plan (SWP), is reverse of SIP where investors withdraw there money invested in existing mutual fund portfolio at predetermined intervals – monthly, quarterly, annually or semi annually. Investor can choose withdrawal interval based on there need.
Investors who have a sizeable amount of investments in MF and want to have a steady income can opt for SWP or can redeem his units himself. With SWP, an investor can withdraw his funds in a systematic manner either for cash or for reinvestment.
How Does A Systematic Withdrawal Plan (SWP) Work?
When you want to sell your MF you get two options either sell all at once or opt for a systematic withdrawal plan. In SWP, you instruct the mutual fund company that you want to withdraw a fixed sum of money every month or quarter.
As per your instructions the MF company will redeem an equivalent amount of mutual funds from your account as per the prevailing Net asset Value (NAV). This process helps investor to get a fixed amount of money every month or quarter.
Lets take an example to understand this process in detail:-
Let’s say you have 5,000 units in a MF scheme. You have given instructions to the fund house that you want to withdraw Rs. 8,000 every month through SWP.
On 1 January, the NAV of the scheme is Rs. 20.
Equivalent number of MF units = Rs. 8,000 / Rs. 20 = 400
400 units would be redeemed i.e. sell off from your MF holdings, and Rs. 8,000 would be given to you.
Your remaining units = 5,000 – 400 = 4600
Now, on 1 February, the NAV is Rs. 16. Thus,
Equivalent number of units = Rs. 8,000 / Rs. 18 = 500
500 units would be redeemed from your MF holdings, and Rs. 8,000 would be given to you.
Your remaining units = 4600 – 500 = 4100
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.
Advantages of a Systematic Withdrawal Plan (SWP)
- Regular income :- SWP is good way to get a fixed amount of money periodically – monthly or quarterly.
- Tax Benefit :- Rather then selling all the units at once, spreading the the income across multiple intervals can lower the total tax. It is a tax efficient way of receiving regular income.
- The biggest advantage of SWP is- the investor will get a specified amount of money on intervals and the balance of the amount remains invested and get returns.
- An investor can withdraw money as and when they need it.
- Help saving an investor from market fluctuations. As regular withdrawal average out return value.
Tax Implications On Systematic Withdrawal Plan (SWP)
Capital gain tax either short term or long term would be applicable on withdrawals made through SWPs just like regular redemptions (Withdrawal before one year will attract tax liability and exit load).