Make SWPs more tax efficient: Here's how

Sukrit is a IT professional based abroad and wants to ensure a regular monthly income for his mother, who lives in India. His mother holds equity and debt mutual funds and Sukrit plans to structure a regular cash flow from these investments using systematic withdrawal plans (SWPs). However, he does not fully understand how SWPs work and wants to learn more about the facility before he opts for it.

In a systematic withdrawal plan (SWP), a few units will be sold automatically from Sukrit’s mother’s mutual fund holdings on a specific date every month. This will determine the amount she can receive each month and the number of units to be redeemed will be calculated based on the prevailing NAV on the SWP date. Besides monthly, one can choose weekly, quarterly or annual frequency, depending upon the requirement.

Sukrit must bear in mind that in an SWP, the rupee cost averaging works in reverse. What this implies is that he effectively sells more units when the markets are down and less when the markets are up. Due to this, his mother’s equity portfolio could deplete much faster than expected. It may be more effective to do an SWP in a less volatile fund such as a shorter-duration debt fund or a hybrid fund. Sukrit must consider moving the requisite amount from an equity to a debt/hybrid fund and then set up an SWP in the latter.


The SWP may become a tax-efficient option if assets are held for the long term. For this, Sukrit may want to initiate SWPs from the debt funds to recieve the benefit of indexation. He can make the shift from equity to debt mutual funds, so that they are able to utilise the indexation benefit from debt mutual funds three years from now.

The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.