A Guide To Swp Mutual Fund Investment Strategies

A Systematic Withdrawal Plan (SWP) is a facility that allows investors to withdraw money from a mutual fund at regular intervals. It is ideal for investors who want to create a regular flow of income from their investments and is often used to fund expenses during retirement. With an SWP, investors can choose the amount and frequency of withdrawal, and can even opt to withdraw only the capital appreciation while keeping their invested capital intact.

How to set up a Systematic Withdrawal Plan (SWP)

A Systematic Withdrawal Plan (SWP) is a facility extended to investors allowing them to withdraw a fixed amount from a mutual fund scheme regularly. It is ideal for investors seeking regular income from their investments.

To set up an SWP, follow these steps:

• Select the fund from your portfolio and tap on it.
• Tap on the relevant button to access the SWP option.
• Enter the withdrawal amount.
• Select the frequency of withdrawal.

The redemption frequency date determines the number of units to be redeemed based on the specified amount. The number of units redeemed for SWP is determined based on the Net Asset Value (NAV) of the previous trading day.

It is important to note that withdrawals through SWP are subject to an exit load, and the tax implications depend on the type of mutual fund and the holding period. SWP is a useful tool for investors who require liquidity and want to access their money when needed, making it easier to carry out financial plans and meet their goals.

The benefits of SWP

A Systematic Withdrawal Plan (SWP) is a useful tool for investors who want to create a regular income stream from their investments. SWP is a good option for those who are retired or approaching retirement and need a reliable income source. Here are some of the key benefits of SWP:

• Regular Income: SWP allows investors to withdraw a fixed amount from their mutual fund investments at regular intervals (monthly, quarterly, or yearly). This provides a steady cash flow to meet expenses, especially during retirement.
• Flexibility: Investors have the flexibility to choose the withdrawal amount, frequency, and date according to their needs. They can also stop the SWP or add further investments at any time.
• Capital Appreciation: If the SWP withdrawal rate is lower than the fund's return, investors can also achieve some capital appreciation over the long term.
• Tax Efficiency: SWP offers tax advantages over traditional investment options like fixed deposits. There is no TDS (Tax Deducted at Source) on the SWP amount for resident individual investors. The capital gains tax treatment depends on the type of mutual fund and the holding period.
• Rupee Cost Averaging: With SWP, investors benefit from rupee cost averaging. By redeeming a fixed amount regularly, the number of units redeemed will vary based on market conditions. This averages out returns and protects investors from potential losses during market downturns.
• Disciplined Withdrawal: SWP helps investors maintain a disciplined approach to withdrawing funds. It prevents investors from depleting their investments too quickly and ensures financial stability.
• Liquidity: SWP provides liquidity to investors by allowing them to access their funds when needed. This makes it easier for investors to carry out their financial plans and meet their goals.
• Suitable for High Tax Bracket: Investors in a high tax bracket may find SWP advantageous due to the absence of TDS on capital gains. Additionally, capital gains from equity/equity-oriented funds are taxed moderately.
• Creating a Pension: Investors without pension earnings can create their own pension by investing their retirement corpus in suitable mutual fund schemes. They can then start an SWP upon retirement to generate a regular income.

SWP vs Dividend option

A Systematic Withdrawal Plan (SWP) is a facility that allows investors to withdraw money from a mutual fund at regular intervals. Investors can choose the amount and frequency of withdrawals, and can either withdraw a fixed amount or only the capital appreciation. This provides a regular income from their investment.

A dividend option, on the other hand, involves distributing profits from a mutual fund scheme to its unit holders. Dividends are declared by the company based on the fund's performance and are not provided regularly. Dividends are also not guaranteed, as they are paid out at the discretion of the fund manager and fund house.

Differences between SWP and Dividend Options:

Control and Flexibility:

SWP offers more control and flexibility to investors as they can decide the withdrawal amount and frequency. In contrast, dividend plans have payouts that are determined and announced by the Asset Management Companies (AMCs) based on the fund's performance, resulting in irregular payouts.

Impact on Taxation:

SWP has a more favourable tax structure compared to dividend plans. In SWP, there is no tax deducted at source (TDS), and dividends are tax-free. However, capital gains tax will be applicable based on the type of scheme and withdrawal amount. On the other hand, dividends are taxable according to the investor's income tax slab.

Predictability of Income:

SWP provides a more predictable income stream as the payout amount and interval are chosen by the investor. In contrast, dividend payouts are not regular and are dependent on the fund's performance, making them less predictable.

Capital Erosion:

SWP can lead to capital erosion as withdrawals reduce the original investment over time. In contrast, dividends do not erode capital as they are paid from the fund's profits, keeping the initial investment intact.

Net Asset Value (NAV):

SWP does not directly impact the Net Asset Value (NAV) of the mutual fund. However, the investment decreases as units are redeemed. Dividend payouts, on the other hand, reduce the NAV of the mutual fund as the distributed profits were part of the fund's value.

Risk and Investment Schemes:

Investors using SWP typically prefer low-risk mutual funds like liquid or ultra-short-term funds to ensure stable capital. In contrast, dividend investors can choose from various schemes based on their risk appetite and investment duration, ranging from high-risk equity funds to low-risk debt funds.

Customisation of Withdrawal Frequency:

SWP offers high customisation in terms of withdrawal frequency, allowing investors to choose weekly, monthly, or quarterly intervals. Dividend payments, on the other hand, have a fixed frequency decided by the mutual fund, such as daily, monthly, or yearly dividends.

Discontinuing the Option:

SWP can be easily stopped, and investors can withdraw their entire investment if needed. In contrast, stopping dividends is more challenging as it requires redeeming the entire investment in the scheme.

Disciplined Withdrawal:

SWP encourages disciplined withdrawals as investors stick to a fixed schedule and amount. This helps manage finances consistently over time. Dividends, with their varying amounts and irregular income, do not promote disciplined withdrawals.

SWP calculator

A Systematic Withdrawal Plan (SWP) is a facility that allows an investor to withdraw money from an existing mutual fund at predetermined intervals. It helps investors to create a regular flow of income from their investments.

An SWP calculator is a simulation that shows you the monthly withdrawals from your mutual fund investments. It also shows the total value of the mutual fund investment after the withdrawal. The calculator consists of a formula box, where you enter the total investment amount, withdrawal per month, the expected annual rate of return, and the tenure of the investment.

Let's say you invested ₹1,00,000 in a mutual fund scheme. You want to redeem an SWP amount of ₹10,000 per month over 12 months. The expected annual return is 7%.

Using the formula: A = PMT ((1+r/n)^nt – 1) / (r/n) )

Where:

• A = Future Value of the Investment
• PMT = Payment amount for each period
• N = number of compounds in a period
• T = number of periods the money is invested

You will have a future value of ₹4,026 at the end of the tenure.

The benefits of using an SWP calculator include:

• Calculating the monthly income from mutual fund investments.
• Trying out different withdrawal amounts to calculate the maturity amount.
• Identifying the best monthly withdrawals from the mutual fund scheme.
• Determining the SWP surplus, which can be invested in other financial instruments.
• Calculating the amount you can withdraw from mutual funds to generate a second income.

SWP and tax implications

A Systematic Withdrawal Plan (SWP) is a facility that allows investors to withdraw a fixed or variable amount from their mutual fund scheme at regular, predetermined intervals. It is the opposite of a Systematic Investment Plan (SIP), where investors contribute a fixed amount to a mutual fund scheme at regular intervals. SWP is ideal for investors seeking regular income from their investments.

When it comes to tax implications, the taxation rules for SWP depend on whether the mutual fund is an equity or non-equity fund. Funds that invest a minimum of 65% in domestic equities are considered equity funds, while the rest are classified as non-equity funds. Here's an overview of the tax implications for each type of fund:

Equity-Oriented Funds

• Gains on investments withdrawn within 12 months are treated as short-term capital gains and taxed at 15%.
• Gains on investments withdrawn after 12 months are considered long-term capital gains and are taxed at 10%. Long-term capital gains on equities up to Rs. 1 lakh are exempt from taxation each financial year.

Non-Equity Oriented Funds (including Debt Funds)

• Gains on investments held for more than three years are treated as long-term capital gains and taxed at 20% after indexation.
• If the investments are sold within three years, the gains are added to the taxable income and taxed according to the applicable slab rate.

It's important to note that for investments made over a period, such as with SIPs, the first-in-first-out (FIFO) method is used, meaning the units bought first are assumed to be redeemed first. Additionally, tax deducted at source (TDS) is not applicable for residents but applies to non-resident Indians (NRIs).

While SWP offers tax benefits compared to the Dividend option, where a 10% Dividend Distribution Tax (DDT) is deducted at the source, it's crucial to understand the tax implications of your specific mutual fund type to make informed investment decisions.

Frequently asked questions