SWP: Systematic Withdrawal Plan


Most investors look at a lump sum investment to get regular fixed amounts after retirement. Popular products include post office monthly income scheme, senior citizens’ savings scheme and monthly income plans of mutual funds. Ideally, an investor must also look at SWP in mutual funds for regular income from investment.

In SWP, an investor can redeem a predefined amount from his mutual fund investment every month, quarterly, half-yearly or annually. He can even withdraw a fixed amount or just the capital gains on his investments. Also, the money withdrawn can be reinvested. SWPs can also be used to create a regular flow of income to meet short-term needs.

SWP is most useful after retirement where there may not be a regular source of income. An investor can instruct the mutual fund to withdraw a certain amount at regular intervals. This gives the benefit to an investor, especially in an upward trending market. In fact, SWP holders are able to secure higher unit prices than those who withdraw the whole amount at once. However, when the equity fund suffers sharp decline in net asset value, the investor would be withdrawing more capital and get less capital appreciation. SWP can be set up to withdraw only the appreciation. In this way, the capital stays invested while he continues to enjoy the gains.

Depending on the investor’s needs, one can choose to withdraw either a fixed sum per month or quarter, or the capital appreciation. Fund houses offer two withdrawal options for SWP. For fixed withdrawal option, the investor specifies the amount he wants to withdraw from the investment on a monthly or quarterly basis. A fixed amount can be withdrawn either on the first, 15th or the last working day of every month or quarter. Secondly, in appreciation withdrawal, one can withdraw only the appreciated amount on a monthly/quarterly basis. The capital appreciation as on the last business day of the month can be withdrawn.

In SWP, tax treatment of each withdrawal is the same as withdrawal from any equity or debt funds. For equity, short-term capital gains (STCG) tax is not applicable on withdrawal after one year of investment. For debt funds, STCG tax applies if units are held less than 36 months. So, SWP gives an investor regular income and saves on taxes in the long term. Investors should opt for SWP in balanced funds as they are less volatile than pure equity funds.

Analysts say SWP scores over dividends from mutual fund for regular income. In SWP, stability of income is maintained. Also, as the quantum of dividend is not guaranteed, investors should look at SWP for regular flow of income after retirement.





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