A Guide about What a Systematic Withdrawal Plan is

A Systematic Withdrawal Plan, also called SWP, is a facility or one of the investment features that enable investors to withdraw funds from their mutual fund in a phase-wise manner. The withdrawal can be made at regular intervals such as monthly, quarterly, half-yearly, or annually.  The dates can be chosen by the investors themselves. This facility is apt for investors who need regular cash flow to meet their periodic expenses.

In stark contrast to lump sum withdrawals from a mutual fund, an SWP can create a stream of income that the investor can direct to their savings bank account. Using the SWP, the investors can create a cash flow that can supplement their monthly income and continue receiving the steady cash flow well into their retirement.

The investor can choose to reinvest the fund into another instrument or gain benefits in form of cash. The two options available to the investor are either to withdraw a fixed amount at certain intervals or withdraw the capital gains earned on the mutual fund investment.

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Importance of a Systematic Withdrawal Plan

As the mutual fund investments are subjected to market fluctuations and risks, the capital gains from the mutual fund may vary according to the market conditions. Market fluctuations may cause the fund NAV to be adversely affected and a timely withdrawal can prevent the erosion of fund returns. That is where an SWP can be a great tool for investors to withdraw their earnings from the fund in a phased manner. It is also helpful to the investors who are investing with a goal in mind. It protects the fund earnings from adverse market conditions. It can be also planned in a way to ensure that your capital remains invested while the gains are siphoned to the savings account of the investor.

Is it a good investment option?

The Systematic Withdrawal Plan has proven to be a beneficial investment option due to the following reasons.

• Regular cash flow: One of the primary needs that most investors have is to periodically gain returns over the investments that they have made. The SWP allows the investor to customize their cash flow according to the financial needs that they may have. This includes having desired cash flow at certain life events such as higher education for children or adequate disposable income in the form of a pension upon one’s retirement.
• Protection from market fluctuations: While investing in mutual funds is generally considered safe, the fluctuations in the market can still hamper the growth of the mutual fund. Through the SWP, the investor can withdraw the capital gains while ensuring their capital stays invested in the mutual fund.

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Factors to decide if SWP is right for you

Before you make up your mind regarding the SWP and the important role it can play in your financial portfolio, you must consider certain factors.

• Regular income: As opposed to the lump sum withdrawal from the mutual funds, the SWP instead focuses on a periodic withdrawal at regular intervals. You can decide how much monthly income are you looking for from the mutual fund in form of SWP and then decide on the frequency and amount.
• Tax implication: The Systematic Withdrawal Plan taxation on the capital gains varies depending on your withdrawal frequency. For example, the capital gains tax on the short-term capital gains of less than 12 months are taxed at 15%, while the long-term capital gains of more than 12 months duration are taxed at 10%, provided the gains are higher than 10%. This is true for equity-based mutual funds while for the debt-based mutual funds withholding period of less than 36 months the capital gains would be included in your overall income and the tax will be according to the income tax slab rate that you fall under. If you have managed to hold a mutual fund for 36 months or more then the flat 20% taxation after indexation is applied.
• Pension: One of the useful ways of using SWP mutual funds is drawing a pension for yourself after your retirement. The SWP capital gains can be periodically collected and deposited in your savings bank account that you can use as a pension for yourself and your dependents. If the investor does not wish to withdraw the amount on a monthly basis then investing in multiple SWPs can also be an option.

A Systematic Withdrawal Plan can easily fortify the cash flow of the investor or provide a secondary stream of income. This makes them a lucrative investment plan. You can use the Systematic Withdrawal Plan calculator to estimate the amount that you can hope to gain from your mutual fund investments. Once you have decided on the desired amount, you can browse through and compare the best Systematic Withdrawal Plan in India and choose the one that fits your needs.

 

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