ET in the classroom: Manage your cash flows smartly with systematic withdrawal plans (SWP)

As investors create wealth using mutual funds, many are also using this corpus as a tool to withdraw money on a monthly basis using a systematic withdrawal plan (SWP). This can be set up in any mutual fund scheme, but is generally used in the case of hybrid funds, large-cap oriented funds or a mix of the two.

What is a Systematic Withdrawal Plan (SWP) in a mutual fund scheme?

An SWP is a feature offered by a mutual fund house, where an investor can withdraw a fixed amount of money at regular intervals, typically every month. Once this is set up and the date is decided, units from your scheme are sold and the proceeds from those are sent to your bank account. The balance units in the scheme from which units are withdrawn keep moving in line with the markets. Increasingly, retirees, senior citizens or any of those eyeing a regular income are using this product.


What is the advantage of an SWP? Are they better than dividends from mutual funds?

Distributors consider an SWP as a far more reliable tool for monthly cash flows than a dividend. In the dividend plan of an equity fund, the quantum and frequency of dividend as well as the date of dividend are not guaranteed. These depend on market movements and the profits that are available in the scheme for distribution. An SWP brings stability of income.

Why are SWPs considered tax efficient?

An SWP is a redemption of units from the scheme, which are equity oriented for taxation purposes. Hence, the tax treatment of each withdrawal will be the same as is applicable to equity-oriented funds. For units held for more than a year, long-term capital gains of 10% will be applicable, while for units held less than a year it is 15%. In addition, long-term capital gains of up to `1 lakh in equity-oriented funds in a financial year are tax free. In comparison, when you opt for a dividend payout in a mutual fund scheme, there is a tax on the dividend paid in line with your tax slab, which could go up to 30% for those in high tax brackets. If the dividend amount exceeds `5,000 in a year, the fund house deducts a 10% TDS, which reduces your cash flows.

What should investors be aware of before starting an SWP?

Investors use the growth option of a large-cap, flexicap, index fund or an equity-oriented hybrid scheme to start an SWP. They should avoid thematic sectoral funds and small, midcap schemes as volatility here is far higher. It is not necessary to start SWP immediately when you invest. It can be started anytime later or whenever there is a need. Similarly, if you have an existing corpus you can activate an SWP by merely filling in the relevant form.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)

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