Mutual funds can serve different investment objectives. While some investors use them to build long-term wealth, others rely on them to generate a regular stream of income from their accumulated corpus. To address these varying requirements, mutual fund houses offer a range of facilities that help investors invest and withdraw money in a structured manner.
One such facility is a Systematic Withdrawal Plan (SWP). In this article, we explain what an SWP is, how it works, its benefits, risks, and the factors investors should consider before opting for it.
A Systematic Withdrawal Plan (SWP) is a facility offered by mutual funds that allows investors to withdraw a predetermined amount from their investment at regular intervals. Instead of redeeming the entire investment at once, investors can receive periodic payouts while the remaining corpus continues to stay invested in the scheme.
Under an SWP, investors can decide the withdrawal amount and frequency based on their financial needs. Withdrawals can be scheduled monthly, quarterly, half-yearly, or annually. On each withdrawal date, the mutual fund redeems the required number of units at the prevailing Net Asset Value (NAV) and credits the proceeds to the investor's registered bank account.
For example, if an investor puts ₹5 lakh into a mutual fund and opts for a monthly SWP of ₹10,000, the fund will redeem units worth ₹10,000 every month and transfer the amount to the investor's bank account. The remaining investment stays in the fund and continues to participate in market movements.
Fixed Amount SWP: Under this option, a predetermined amount is withdrawn at regular intervals. Since the withdrawal amount remains constant, the number of units redeemed varies depending on the scheme's NAV on the withdrawal date.
Appreciation SWP: Under this option, only the gains generated by the investment are withdrawn, while the original invested amount or the principal remains invested. The withdrawal amount may vary depending on the scheme's gains and prevailing market conditions.
Step 1: Ensure you have an existing mutual fund investment with a sufficient corpus to support your withdrawal plans.
Step 2: Log in to your mutual fund account, AMC website, or investment platform such as Groww.
Step 3: Select the specific fund folio from which you want to set up withdrawals.
Step 4: Choose the SWP option and enter your withdrawal amount, frequency, and start date. You can also set an end date or total number of instalments.
Step 5: Confirm the instruction. The fund house will automatically redeem units and credit proceeds to your registered bank account on each scheduled date.
Step 6: Review annually and adjust if your financial needs or market conditions change.
Before committing to a withdrawal amount, it is important to understand how different withdrawal rates affect your corpus over time. The Groww SWP Calculator lets you enter your investment amount, expected return rate, monthly withdrawal amount, and tenure to instantly see your projected corpus value at the end of the period.
By adjusting the withdrawal amount or return assumption in the calculator, investors can identify a sustainable withdrawal level before setting up the SWP. Use the Groww SWP Calculator to model your own numbers across different scenarios.
Investors seeking regular income from their mutual fund investments generally have two options: the Income Distribution cum Capital Withdrawal (IDCW), formerly known as the Dividend option, or a Systematic Withdrawal Plan (SWP).
Under the IDCW option, distributions are generally taxable in investors' hands at their applicable income tax rates. In addition, a 10% TDS may apply if IDCW receipts from a fund house exceed the prescribed threshold.
In contrast, SWP withdrawals are not subject to TDS. Since an SWP involves redeeming mutual fund units, capital gains tax applies only to the gains component of each redemption rather than the entire withdrawal amount.
The tax treatment of SWP withdrawals depends on the type of mutual fund and the holding period of the investment, as shown below:
|
Fund Type |
Short-Term Capital Gains (STCG) |
Long-Term Capital Gains (LTCG) |
|
Equity Mutual Funds |
20% |
12.5% on gains above ₹1.25 lakh per financial year (holding period over 12 months) |
|
Equity-oriented Balanced Mutual Funds |
20% |
12.5% on gains above ₹1.25 lakh per financial year |
|
Debt Mutual Funds (purchased after April 1, 2023) |
Taxed at the applicable income tax slab rate |
As per the applicable income tax slab |
Note: Tax rules are subject to change. Investors should consult a tax advisor or financial professional for advice based on their individual circumstances.
Since the capital gains tax under SWP applies only to the profit component of each redemption (not the full withdrawal amount), SWP may offer better tax efficiency than IDCW for many investors.
Redeeming an entire mutual fund investment at once can expose investors to market-timing risk. If markets are down on the redemption date, the value realised may be lower than expected.
An SWP helps reduce this risk by spreading withdrawals across multiple dates. When the NAV is high, fewer units are redeemed for the same withdrawal amount, and when the NAV is low, more units are redeemed.
Here is an example: Suppose you have invested ₹6 lakh in a mutual fund and set up an SWP of ₹50,000 per month. Here is how the number of units redeemed varies as the NAV fluctuates each month:
|
Month |
NAV |
Withdrawal (₹) |
Units Redeemed |
|
January |
₹100 |
₹50,000 |
500 |
|
February |
₹80 |
₹50,000 |
625 |
|
March |
₹120 |
₹50,000 |
417 |
|
April |
₹90 |
₹50,000 |
556 |
|
May |
₹110 |
₹50,000 |
455 |
Total withdrawn: ₹2,50,000 Total units redeemed: 2,553
Average NAV across these months: ₹100. But your average redemption price works out to ₹2,50,000 ÷ 2,553 = ₹97.9 per unit, illustrating how SWP spreads redemptions across different NAV levels instead of relying on a single exit point. This is rupee cost averaging in action.
Note: Rupee cost averaging does not protect investors from losses. In a sustained downturn, more units are redeemed at depressed prices, which can accelerate corpus depletion. It may help moderate short-term volatility, but it does not shield investors from a prolonged bear market.
If the annual withdrawal amount is lower than the scheme's returns, the corpus may support withdrawals for a longer period, and investors can realise a portion of those gains through systematic withdrawals. However, mutual fund returns are market-linked and not guaranteed. The corpus can deplete more quickly during extended bear phases if withdrawals outpace returns.
Just as a Systematic Investment Plan (SIP) helps you adopt a disciplined approach to investing, an SWP helps you steer clear of panic-driven, large-scale redemptions during market corrections. By committing to a scheduled withdrawal plan, investors can keep redemptions more structured and predictable.
SWP provides a predictable income stream delivered directly to your bank account at regular intervals. This makes it particularly valuable for retirees managing monthly living expenses or anyone who needs to fund recurring obligations without having to manually initiate redemptions each time.
Investors can generally modify, pause, or discontinue SWP instructions in most open-ended mutual funds, subject to the AMC's operational processes and applicable notice periods. Investors can also switch between withdrawing a fixed amount and withdrawing only capital appreciation based on their financial needs.
While an SWP can provide regular cash flow, investors should be aware of the following risks:
It is important to note that SWP withdrawals are funded through the redemption of mutual fund units. If withdrawals consistently exceed the returns generated by the investment, the corpus may gradually reduce over time. Therefore, an SWP should not be viewed as a guaranteed or risk-free source of income.
Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.
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