SWP (Systematic Withdrawal Plan) is the lesser known twin of SIP (Systematic Investment Plan). SIPs have gained immense popularity in India in recent times. SWPs does the reverse of what SIP.


What is SWP?


Systematic Withdrawal Plans (SWP), allows you to withdraw a fixed amount of money from a mutual fund at a fixed interval.

SWP is somewhat the reverse of SIP. If you invest lump sum in a mutual fund, you can set an amount you’ll withdraw regularly and the frequency at which you’ll withdraw.

So instead of eating into your savings, you can put it in a mutual fund and withdraw regularly from it. This way, you can take only what you need and let the remainder of your money generate more wealth for you. If the amount you withdraw is less than the amount your mutual fund generates, you can continue withdrawing from this fund forever.

For example, let’s say you invested in HDFC Top 200 Fund an amount of ₹1 lakh for a year. Let’s assume that you decided to withdraw an amount of ₹10000 per month. So every month, your investment in the fund will reduce by ₹10000. The amount left every month after withdrawal will continue to remain invested.


What are the risks involved in SWPs?


SWPs help you reduce your exposure to risk.

Every investment has its share of risks. SIP takes advantage of averaging to help you reduce exposure to risk. SWP does the same. If you’ve invested in a mutual fund in a lump sum manner, by withdrawing a fixed amount regularly, you ensure your returns are averaged and you are protected from any volatile market movements.

In the times when the fund is performing poorly, you’ll be selling more units of your mutual funds to withdraw. Conversely, when the fund is performing well, you’ll be selling a lower number of units to withdraw the same amount. Thus, over a long period of time, the effect is averaged.


What is the tax applicable on the amount?


Treat the SWP withdrawal amount as you redeeming from a growth fund and calculate the tax.

There is no separate tax structure for the amount you receive via SWP. Every time you receive money via SWP, you must treat it as an amount you redeemed from the mutual fund. Whenever you redeem an amount from a mutual fund, different tax rates are applicable based on the type and duration of investment in a mutual fund. For example, there is no tax applicable on amounts redeemed after a year from an investment in case of equity mutual funds. Understand tax of mutual funds better here.


What is the difference between investing in dividend mutual funds and investing via SWP?


The biggest difference is that SWP gives you fixed periodic returns.

In the case of dividend funds, the amount and frequency of payment of dividend is decided by the fund manager. If you are dependent on a fixed amount of money at fixed intervals of time, dividend funds can upset you when they pay below your expectation.

On the other hand, in the case of SWP, you get a fixed amount at whatever interval you opt for. If the fund’s performance is good, the SWP will last longer. If the performance is poor, it’ll finish sooner.

Nearly all mutual funds allow SWP.


Depending on your need, risk appetite, and corpus, different schemes and plans might suit you. Make sure to research thoroughly before investing.

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