SWP in Mutual Funds – Working, Benefits and Calculation

Last Updated on May 3, 2023 by Anjali Chourasiya

A Systematic Withdrawal Plan (SWP) can be termed as the opposite of a Systematic Investment Plan (SIP), where instead of investing your money smartly, you withdraw the same systematically. The main objective of SWP is to create a steady income substitute through the debt and money market. In this article, let’s dive deeper into SWP in mutual funds and its features.

Table of Contents

What is SWP in mutual funds?

In a Systematic Withdrawal Plan, you systematically redeem your mutual fund units after a certain time with a profit. You can withdraw the money at your own pace quarterly, monthly or yearly. These mutual funds are low-risk but give considerable profit, as the withdrawal is based on the market’s Net Asset Value (NAV) on that particular day.

Working of SWP in mutual funds with an example

You may be wondering how an SWP works. The steps involved in the process are as follows:

You can register for SWP in mutual funds with the estimated withdrawal amount and frequency of the withdrawal.
The standing instruction is registered with the mutual fund, which will automatically redeem the units and deposit the same in the bank account registered at regular intervals.
The balance units after the withdrawal will become the value of the mutual fund.

For example, let’s assume you have invested Rs. 1 lakh for 10,000 units of a mutual fund scheme.

In this case, the NAV of the scheme is Rs. 10. You have set instructions to get Rs. 5,000 every month. On 1st February 2023, the NAV of the scheme was Rs. 10. Hence the Asset Management Company (AMC) would redeem 500 units of your fund and give you Rs. 5,000. Now you’ll be left with 9,500 units.

On 1st March 2023, the NAV of the fund was Rs. 15. So the AMC will redeem 333 units of the fund and give you Rs. 5,000. Now you’ll be left with 9,167 mutual fund units. This will continue for the rest of the period till all your mutual fund units are sold out.

Benefits of SWP in mutual fund

Investment in SWP provides tax benefits as it combines capital and income, where the tax only applies to the income component and not the capital component.
SWP provides you with a systematic fixed income, which is helpful after retirement.
SWP allows you to curb impulsive withdrawals, which are subjected to panic or fear when the market crashes or on emergency terms.

SWP in mutual funds withdrawal

Fixed withdrawal plan – When you redeem the units, you will get returns in your bank account.
Appreciation withdrawal plan – Here, you can withdraw only the appreciated amount on a monthly/quarterly basis.

Calculating the return on SWP

An investor needs to get a basic idea of the investment amount, return values, tax deductions, interest or any other penalty charges and other things to ascertain the correct SWP. There are many ways to do that, but the easiest is the SWP calculator, which is available online. The SWP calculator considers many elements such as age, salary, your desired expectations, current savings and other elements for calculation.

For systematic withdrawals to commence, most accounts have a minimum balance requirement. For accounts with various assets, you may be able to designate liquidation percentages by funds for convenience. This can occur with mutual fund company assets, brokerage accounts, or financial advisor-managed portfolios.

Why can SWP mutual funds be a good option?

Mutual funds are subjected to market risk, and the government has recently decided to tax the dividends paid by these mutual funds. With the risk factor and the taxing of dividends, if you are choosing to opt for SWP as the returns are not fully taxed, and the risk factor is generally very low.

Many investors have started investing in SWPs in aggressive hybrid schemes due to the presumption that the fund will be less volatile than pure equity schemes. However, most of these investors discovered during the recent downturn that their corpus had shrunk dramatically due to regular withdrawals and adverse market conditions. When configuring an SWP, keep this in mind.

You should also be cautious about how much you intend to withdraw from your monthly investment. If you do not want to lose the capital, withdraw less than the scheme’s returns.

For example, if you expect a 7% return from the scheme, you should withdraw only 5% or 6% of your investment. In this case, it would be better to seek expert advice. In addition to preparing for and initiating a systematic withdrawal plan, you may want to consider taxes and possibly a systematic transfer plan. A tax advisor can assist you in determining the tax rate on withdrawals from both standard and retirement accounts. Because withdrawals from standard accounts necessitate the sale of securities, they are typically taxed as income.

How to invest in an SWP mutual fund?

Investing in SWP mutual funds is similar to investing in any mutual fund scheme. Once you have selected the right mutual fund scheme that aligns with your investment objectives and risk appetite, you can inform AMC and select SWP for your investment. But before signing the documents, read the terms and conditions involved with the scheme and the plan selected.

Conclusion

SWP is generally a good investment option for those seeking returns after retirement or who like safe investments. Investing in SWP in mutual funds is an excellent way to create a consistent source of side income. Inevitably, you can start an SWP and earn average returns without risking your capital. A systematic withdrawal plan regularly recovers your invested funds from a mutual reserve program. Unlike lump-sum withdrawals, it allows you to withdraw funds in instalments. You can also withdraw only the capital gains from your venture or a fixed sum.

You can use Tickertape Mutual Fund Screener to find the best mutual fund schemes based on 50+ filters. Once you’ve invested in a mutual fund scheme, keep an eye on the fund constantly. And to make it quick and easy for you, we’ve added a new Mutual Funds Portfolio, which helps you track the performance of your portfolio effortlessly. Explore the new Portfolio now.

FAQs

What is SWP meaning in mutual funds?

SWP in mutual funds means Systematic Withdrawal Plan. As the name suggests, it’s a plan in the mutual funds in which you redeem your mutual fund units in a systematic manner at regular intervals.

What is the difference between SIP and SWP in mutual funds?

SIP and SWP are for investors who want fixed income with lower risk and good returns. In SIP, there is no lump sum investment but rather small investments over a period of time, while in SWP, the investment is a lump sum, and the withdrawal is made in small quantities over a period of time.