Systematic Withdrawal Plan (SWP)

SWP – What is a Systematic Withdrawal Plan?

Investors can choose to withdraw a fixed amount of money at regular intervals from their investment in mutual funds. This entire investment procedure is termed as Systematic Withdrawal Plan or the SWP. 

These periodic intervals can be monthly, quarterly, half-yearly or annually. The most popular choice among investors is the monthly option.  

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This plan is most popular amongst retired or retiring people; as this ensures a steady flow of income every month. However, it is not limited to that utility or customer base alone. 

The amount to be withdrawn is customizable as per an investor’s requirements. Whenever a withdrawal happens, that amount is deducted from the investment in mutual funds. And the investment that remains is subjected to the average Net Assets Value (NAV). 

This strategy has proven to be one of the most successful approaches to deal with market corrections. 

How does it work?

Suppose, an investor has investments worth Rs. 2,00,000 in mutual funds. He also avails a monthly SWP wherein he withdraws Rs. 20,000 from April. Taking into consideration that the SWP is only for 5 months, this is how his investment trajectory will go. 

On the first month, he withdraws Rs. 20,000 from his funds. The average NAV is 10.3 on that day. The number of units he redeems is 1942, and the number of units left in the fund is 18058. Accordingly, his investment value is Rs. 185997 as per the NAV. 

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In May, he again receives Rs. 20,000 at an average NAV of 10.5. He thereby redeems 1905 units. The number of units in his funds is now 16153. That brings his investment value down to Rs. 1696090. 

In June, another Rs. 20,000 is credited to his account. The NAV on that day is 10.2. Therefore, the number of units that are redeemed are 1961. The funds have 14192 units of his investment, and the investment value is Rs. 144761. 

In the next month, again Rs. 20,000 is withdrawn from the funds at a NAV of 10.4, and accordingly, the units redeemed are 1924. The number of units left in funds is 12268, and the investment value is Rs. 1275872.

Then again in August, the same is repeated with a NAV of 10.3. As a result 1942 units were redeemed and the units left are 10326. The investment value then is Rs. 106360 as per the NAV.

Month Withdrawal (Rs.) No. of units in funds NAV Investment value
April 20,000 18058 10.3 185997
May 20,000 16153 10.5 1696090
June 20,000 14192 10.2 144761
July 20,000 12268 10.4 1275872
August 20,000 10326 10.3 106360

Types of SWP in mutual funds

Fixed periodic withdrawal:  If you avail this withdrawal type, then at every pre-set interval, you will be entitled to receive an amount which is partly deducted from your investment, and partly from the returns on your investment. 

Capital appreciation withdrawal: In case of capital appreciation withdrawal, you will receive an amount at every interval equivalent to the earnings on your investments. In this type, the corpus amount will not be deducted with each withdrawal.

For example, if you invest an amount of Rs. 100,000 in mutual funds and the average returns on that is 2% then you are entitled to receive Rs. 2000 each time. Your principal amount stays intact. 

Advantages of an SWP plan

  • Rupee cost averaging:  The use of rupee cost averaging method in SWP is one of the reasons for its popularity. This method gives it an advantage over the lump sum option, as it is not dependent on the NAV of a single day, but rather on an average NAV.

Let’s take the previous example again:

Month Withdrawal (Rs.) No. of units in funds NAV Investment value
April 20,000 18058 10.3 185997
May 20,000 16153 10.5 1696090
June 20,000 14192 10.2 144761
July 20,000 12268 10.4 1275872
August 20,000 10326 10.3 106360

Now, in the case of lump-sum withdrawal, the amount of Rs. 1,00,000 is drawn in August at one go. Therefore it is only subject to the NAV of that day. In that case, the units redeemed will be 9709, the units left in funds will be 10291, and the investment value is 105997. 

Month Withdrawal (Rs.) No. of units in funds NAV Investment value
August 1,00,000 10291 10.3 105997

As is apparent, the amount in August is more in case of SWP than the lump sum.

  • Disciplined investing: It often happens that due to market fluctuations, investors are inclined to withdraw large chunks of their investments or invest more than initially planned. SWP plans automatically credit the investor’s account with a fixed amount at regular intervals, thus keeping the investments steady. This method prevents investors from acting irrespective of market corrections.
  • Fixed income: You are assured to receive a fixed amount of money at regular intervals. This income can facilitate many periodic expenses.

Tax connotation of SWP mutual funds in India

There are a few things which need to be factored in when calculating tax on SWP such as the type of funds one is withdrawing from and the duration of the holding period. 

In case of debt funds, any drawing before 3 years is taxed as per your standard slab rate. After 3 years, the rate is 20% after indexation. Indexation uses price index as its metric. It is used to maintain the purchasing power of individuals after inflation. Therefore, your tax liability is adjusted as per the price index.  

When equity funds are concerned, any withdrawal within 1 year of investment is considered as short term capital gains. In that case, a 15% tax rate is applicable as part of the Short term Capital Gains tax or STCG. Any withdrawal after 1 year is considered a long term capital gain and is due for the Long Term Capital Gains tax or LTCG. In such a case, the tax rate is 10% above Rs. 1,00,000.

Exit load

An exit load is a charge imposed by an AMC when you apply for an SWP before a specific period.

Suppose you have opted for a one-year scheme for which there is an exit load of 2%. You wish to withdraw monthly an amount of Rs. 15,000 from the 7th month. Then every time you withdraw, you will be charged Rs. 300 and receive an amount of Rs. 14700.