SWP or Systematic Withdrawal Plan is a facility offered by mutual funds to redeem units. The plan allows investors to exit their investments in small portions at regular intervals to meet their short-term goals or regular monthly income needs. These intervals can be monthly or quarterly.
Uses Of Systematic Withdrawal Plans (SWP’s) IN Mutual Funds
Usually, retired people use SWPs to create a regular flow of income from their investment corpus in mutual funds. But others can also use it for goals such as child’s education, to pay EMIs, to pay bills etc.
Salient Features Of SWP’s
- • Minimum Account Balance - In order to start the SWP facility, the minimum account balance should be Rs 25,000.
- • Time Intervals - The frequency generally available to withdraw are on monthly, quarterly or annual period basis.
- • Nature/Type Of Withdrawal Possible - Investors normally have two options to choose from fixed withdrawal wherein a certain amount of money can be withdrawn.
- • Appreciation Withdrawal - Wherein amount of appreciation only can be withdrawn.
Benefits Of SWP In Mutual Fund -
- Rupee Cost-Averaging - SWP can be more beneficial if it is designed for a longer period as it let investors take the advantage of rupee cost averaging. Rupee cost averaging is an approach in which a person invests a fixed amount of money at regular intervals. This ensures that the investor buys more shares of an investment when prices are low and less when they are high.
- Tax Advantage - When investors withdraw the money invested in mutual funds within a year, it attracts some amount of short-term capital gains. However when we withdraw the amount through SWP, it would not attract any tax. All the amount withdrawn in the first year would be the capital itself.
Mutual fund withdrawals are subject to tax depending on the category of the funds you own. Debt funds and equity funds are taxed differently. Systematic Withdrawal Plans (SWP) redemption is as per first in first out (FIFO) method wherein units first bought are assumed to be redeemed first. Hence your costs for the purpose of taxation will be considered as per FIFO method.If you redeem/withdraw your investments in equity mutual funds after 12 months, your investments would qualify for long-term capital gains tax which is nil at the moment. If you sell your equity mutual fund investments before 12 months, you will have to pay a short-term capital gains tax at a flat rate of 15 per cent.
Debt mutual funds qualify for long-term capital gains tax only if investments are held for three years. The long-term capital gains tax on debt funds is 20 per cent with the inflation indexation benefit on your original investments. If debt mutual fund investments are sold before three years, the short-term gains are taxed as per your applicable Income Tax slab.
Your SWPs will also be taxed as per the above rules. Based on your requirement and tax slab you can plan your SWP accordingly.
- Good For Investors Looking For Fixed Income - SWP is good for investors who look for regular income for over a period of time.
Benefits Of SWP In Mutual Fund -
- Post-Retirement Income - SWP is one of the best ways to create a regular source of income post-retirement. Investments in debt funds, balanced funds etc can help gain more, apart from letting you withdraw at regular intervals.
- Better Use Of Surplus Funds - If you have lump-sum surplus fund, a SWP allows you to invest that amount in mutual fund schemes and withdraw that amount in as per your requirement, hence enabling a disciplined way of managing your savings.
- Best Substitute For Pension - Income from most of the pension plans is taxable, whereas if you invest in mutual funds and do a SWP, the amount you withdraw is tax-free. People can try creating a corpus 3-4 years before retirement and invest that later in an equity mutual fund to choose a SWP plan in order to save tax more efficiently.
- Capital Protection - Risk-averse individuals can invest in arbitrage mutual funds as returns on these funds are risk-free. Under arbitrage funds, dividends are totally tax-free. Investors can reinvest the dividend received from their investments made in arbitrage funds and do a separate SIP, which can later be used to do regular SWP.