Everything you need to know about systematic withdrawal plan (SWP)

Many investors want a monthly cash flow from their mutual funds to meet their expenses. Financial planners recommend such investors use SWP, which can help meet those needs. SWPs can be set up in any open-ended mutual fund scheme, but most investors prefer to set them up in an equity fund or a hybrid fund.

What is systematic withdrawal plan (SWP)?
In SWPs, you invest a lump sum amount in a mutual fund scheme and then keep redeeming a fixed amount, typically once every month, from the same scheme. This ensures you get a fixed amount of money at a fixed interval every month and the balance money keeps growing in line with the markets. Many retired individuals and senior citizens use this money to meet monthly expenses.


What is the benefit of SWPs? How do they score over dividends in mutual funds?
Financial planners point out that SWP is a more reliable tool to take regular money than a dividend. In the dividend plan of an equity fund, both the quantum and frequency of dividend is not guaranteed and it largely depends on market movements and the profits the asset management company earns. It works better than relying on mutual fund dividends for regular income, as it brings stability of income.

How important is the taxation aspect?
SWP is redemption of units from the scheme. 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 for less than a year it is 15%. In addition, long-term capital gain of up to `1 lakh in equity-oriented funds in a financial year is 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 42% for rich investors. If the dividend exceeds `5,000 in a year, the fund house deducts a 10% TDS.

How do you start an SWP?
Investors generally use the growth option of an equity-oriented or hybrid scheme to start an SWP. Generally, investors avoid using sectoral funds. You can start it while investing in a fund. If you already have a mutual fund scheme, you can activate the SWP option in the scheme. To activate it, you need to simply fill out an instruction slip with the AMC stating the folio number, withdrawal frequency, date for the first withdrawal, and the bank account to credit the proceeds.