SWP Systematic Withdrawal Plan is a facility for regular cash flow. It gives you the freedom to withdraw your long-term investments in tax efficient and as per need. You can withdraw money from your existing mutual fund investments at pre-determined intervals, be it weekly, monthly, quarterly, half-yearly or even annually, to create a regular cash flow for your needs.
Many investors who are aware of SWP think that it is for only retired people. You are not wrong as SWP has been positioned (read SOLD) in this way only. But one can also use it for booking profits or use to fulfill a goal like a child education or parents support.
You can also plan your investments and withdrawals in a tax-efficient way. Thus, giving you the potential to earn more returns over a period, as you withdraw bit by bit.
When you start an SWP, a fixed amount of money is withdrawn every month by liquidating the required number of units based on the asset value of the scheme at the time of withdrawal. For example, you have 1000 units in a mutual funds scheme and its current net asset value is Rs.10. You have put in an SWP request of Rs. 500. Therefore in the current month, 50 units will be redeemed to meet your SWP request.
Types of SWP
Fixed withdrawal: This means you fix up a sum as per your need say Rs 5000 monthly or RS 10000 a quarter. This chosen amount either in debt or equity mutual funds, you can withdrawal from it systematically through SWP.
Many mutual funds under this option send you post-dated cheques and you can encash them at the defined date.
Appreciation Withdrawal: Here in this option you only withdraw the appreciated part only. Under this option, the capital is preserved and withdrawal does not take place if the appreciation is not there for any reason (like a correction in the market).
Benefits of SWP Systematic Withdrawal Plan
Regular supplemental income: An SWP can provide a steady source of income for those who need money when their cash flow comes to a halt like a retirement, or at a time when supplements income becomes a necessity due to altered circumstances in life. Besides retirement SWP can help meet Financial goals if planned well ahead of time.
They can, therefore, be linked to long-term financial goals, such as providing a steady income in one’s retirement years.
The biggest benefit of SWP: TAXATION
Since there is no tax deducted at source (for eg bank FDs etc) on capital gains and all investments in mutual funds fall into this categories it becomes quite an investor-friendly tool.
In equity investments, if SWP is started after a year the tax liability is Nil. If SWP is done before one year only short-term capital gains tax of 15% is applicable on withdrawals (Appreciation part only: see illustration below) from equity investments.
In Debt Funds any withdrawal within one year Tax is added to the income and investor pays tax according to his tax bracket. If they are held for less than 36 months only 20% tax on appreciation is payable with indexation benefit as tax.
For those who fall in a higher income tax bracket, an SWP CAN BE FAR MORE TAX EFFICIENT than a traditional on investment option.
This is also because in SWP the tax is paid only on the gains made due to the net asset value movement and not on the principal part in the withdrawals making a part in the withdrawals making the overall tax incidence lesser.
In the case of a traditional investment option, the entire gain is taxed according to the investor’s tax bracket (the highest currently being 30%).
Who can use SWPs
Use of SWPs may not be restricted to retirees alone. You can set up an SWP from your existing mutual funds corpus at any age, and provides a steady stream of income for your aging parents, dependent spouse or kids.
SWPs may turn out to be the most useful for retirees or those approaching their retirement years. If you are an investor who has invested steadily in mutual funds for the long-term (10-15) years you can enjoy the fruits of capital appreciation along with systematic tax-efficient withdrawals in your retirement years and lead a dignified and comfortable life.
Since SWPs in most cases provide a fixed amount. You can enjoy the benefits of a steady stream of income without having to dill lute your investments or redeem your units all at once.
However, your initial investments and the appreciates amount must be robust enough to support an SWP for the long term.
With SIP/STP, one should look at SWP for withdrawing the amounts when a goal is fulfilled. Withdrawing in a tax efficient way is also important in investments.
Hope you liked this small write-up of SWP Systematic Withdrawal Plans.
Share your views below in the comments section.