Systematic Withdrawal Plan (SWP) in Mutual Funds: Meaning, Benefits & How to Start in 2024
You’ve probably heard of Systematic Investment Plans (SIPs) – the hassle-free way to grow your wealth by consistently investing a fixed amount over time. SIPs have been the go-to strategy for building financial security and achieving long-term financial goals. But what happens when you’ve accumulated a sizable amount and would like to withdraw systematically? That’s where Systematic Withdrawal Plans (SWP) comes into picture.
Thus, in this blog, we will delve into what SWP in mutual funds means, the best mutual funds for SWP, how to invest, benefits, taxation, and more.
What is SWP in Mutual Fund?
A Systematic Withdrawal Plan (SWP) is an extended facility in mutual funds that enables you to withdraw money from your investments in a systematic manner, especially during retirement. With an SWP, you can choose your withdrawal amount, frequency, and duration according to your needs. The best SWP plans in India provide liquidity to investors, allowing them to access their funds when needed, making it a suitable option for those who require regular cash flows.
Here are some important features of a systematic withdrawal plan:
- SWP provides investors with a scope of regular income.
- With SWP, you can easily withdraw a fixed amount from your investment at scheduled intervals.
- One can also choose the withdrawal amount, frequency, and duration of the SWP according to their financial needs and requirements.
- It can instil a disciplined approach to withdrawing funds, ensuring investors do not deplete their investments too quickly.
How Does a Systematic Withdrawal Plan Work?
Let’s understand how a systematic withdrawal plan works with an example.
Assume you have invested Rs. 1,00,000 in a mutual fund and want to withdraw a specific amount every month. Therefore, you decide to set up an SWP to withdraw Rs. 5,000 on a specific date every month. The mutual fund’s Net Asset Value (NAV) is Rs. 20 per units.
Now, let’s have a look at the SWP mutual funds return calculation process.
Calculate the Number of Units to Redeem
To withdraw Rs. 5,000, the AMC calculates how many mutual fund units need to be redeemed each month. Let’s apply the following formula to find that out:
Number of Units to Redeem = Withdrawal Amount / NAV
- Number of Units to Redeem = Rs. 5,000 / Rs. 20 = 250 units
Redemption Process
At the beginning of each month, the mutual fund will redeem 250 units from the investor’s holdings and credit Rs. 5,000 to the investor’s bank account.
Adjusted NAV
After the redemption, the NAV of the mutual fund may change. Let’s say the NAV after the first redemption is Rs. 22.
Calculate the New Number of Units
For the next month’s withdrawal, the investor needs to calculate how many units to redeem at the updated NAV.
- Number of Units to Redeem = Withdrawal Amount / NAV
- Number of Units to Redeem = Rs. 5,000 / Rs. 22 = 227.27 units (rounded to the nearest whole unit)
Redemption Process (Next Month)
At the beginning of the second month, the mutual fund will redeem 227 units (rounded) from the investor’s holdings at the new NAV and credit Rs. 5,000 to the investor’s bank account.
This process continues every month as long as the investor wants to receive regular withdrawals.
| Steps | Details |
|---|---|
| Initial Investment | Rs. 1,00,000 |
| Monthly Withdrawal Amount | Rs. 5,000 |
| Mutual Fund’s NAV | Rs. 20 per unit |
| Number of Units to Redeem (Month 1) | Withdrawal Amount / NAV = Rs. 5,000 / Rs. 20 = 250 units |
| Redemption Process (Month 1) | At the start of the month, the mutual fund will redeem 250 units and credit Rs. 5,000 to the investor’s bank account. |
| Adjusted NAV (After Month 1) | Rs. 22 per unit (example) |
| New Number of Units (Month 2) | Withdrawal Amount / NAV = Rs. 5,000 / Rs. 22 ≈ 227.27 units (rounded to nearest whole unit) |
| Redemption Process (Month 2) | At the start of the second month, the mutual fund will redeem approximately 227 units (rounded) at the updated NAV and credit Rs. 5,000 to the bank account. |
How to Start SWP in Mutual Funds Online?
Now you must be wondering, “How to invest in SWP?”. Here are a few steps that can help you to set-up a mutual fund SWP.
- When investing in mutual funds, one can explore different categories like equity, debt, hybrid. Investors can also look out for specific options that aligns well with your investment goals, risk tolerance, and timeline.
- To initiate a SWP, investors need to submit a SWP form, also known as a distribution form, to their account provider. This form allows them to choose a distribution schedule, such as monthly, quarterly, or annually, to suit their financial needs.
- Once the SWP scheme is set up, investors can enjoy a steady stream of regular withdrawals tailored to their specific needs. The predetermined amount will be automatically transferred to their designated bank account on the scheduled dates, providing a hassle-free and predictable income stream.
Best SWP in Mutual Funds in India 2024 (Based on 3Y CAGR)
| Name | AUM (Rs. in cr.) | CAGR 3Y (%) | Expense Ratio (%) |
|---|---|---|---|
| ICICI Pru Equity & Debt Fund | 39,090.93 | 22.63 | 0.99 |
| Quant Absolute Fund | 2,295.21 | 19.95 | 0.70 |
| UTI Aggressive Hybrid Fund | 6,189.11 | 18.91 | 1.26 |
| Nippon India Equity Hybrid Fund | 3,893.74 | 18.12 | 1.15 |
| Franklin India Equity Hybrid Fund | 2,029.67 | 16.29 | 1.03 |
Disclaimer: Please note that the above list is for educational purposes only, and is not recommendatory. Please do your own research or consult your financial advisor before investing.
Note: The list of top mutual funds for SWP is from 30th September 2024, and the data is derived from Tickertape Mutual Fund Screener.
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Overview of the Top 5 SWP Mutual Funds
ICICI Prudential Equity & Debt Fund
Launched in November 1999, ICICI Prudential Equity & Debt Fund is a hybrid mutual fund that aims to provide investors with long-term capital appreciation and income by investing in a mix of equity and debt instruments. The fund primarily invests in equity-related securities with a smaller allocation to debt and money market instruments, providing a balance of growth and stability. As of 30th September 2024, the fund has an AUM of Rs. 39,090.93 cr., delivering a 3-year CAGR of 22.63%. The expense ratio is 0.99%.
Quant Absolute Fund
The Quant Absolute Fund was introduced in January 2013 to provide capital appreciation and income distribution by primarily investing in equity and equity-related instruments, with a limited portion allocated to debt securities. It follows a multi-asset allocation strategy that enables diversification across asset classes. The fund currently holds an AUM of Rs. 2,295.21 cr., with a 3-year CAGR of 19.95%. It maintains an expense ratio of 0.70%.
UTI Aggressive Hybrid Fund
UTI Aggressive Hybrid Fund, launched in February 1995, is an open-ended hybrid fund that seeks long-term capital appreciation and income generation by investing predominantly in equity and equity-related securities while maintaining a smaller allocation to debt instruments. The goal is to provide investors with an aggressive growth-oriented portfolio but with a cushion from debt exposure. The fund manages an AUM of Rs. 6,189.11 cr., achieving a 3-year CAGR of 18.91%. It has an expense ratio of 1.26%.
Nippon India Equity Hybrid Fund
Launched in December 2004, the Nippon India Equity Hybrid Fund is an aggressive hybrid scheme that aims to generate long-term capital appreciation by investing in a diversified portfolio of equity and debt instruments. The equity portion allows for growth, while the debt allocation helps to balance risk and provide income stability. The fund’s AUM stands at Rs. 3,893.74 cr., with a 3-year CAGR of 18.12%. It comes with an expense ratio of 1.15%.
Franklin India Equity Hybrid Fund
Franklin India Equity Hybrid Fund was launched in December 1999 with a focus on achieving a balance of income and growth by investing in equity and debt instruments. The equity exposure provides the potential for capital appreciation, while the debt instruments offer income generation and risk management. The fund has an AUM of Rs. 2,029.67 cr., and has delivered a 3-year CAGR of 16.29%. It carries an expense ratio of 1.03%.
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Who Can Benefit from the Top SWP Funds?
SWPs can be suitable for investors who are seeking a regular income stream from their investments. While Income Distribution Cum Capital Withdrawal (IDCW) plans of mutual funds can also provide periodic payouts, they are not as reliable as SWPs since the dividend declarations are at the discretion of the fund house.
SWPs can also be useful for investors who want to maintain a disciplined approach to withdrawing money from their savings. By setting a fixed withdrawal amount, they can ensure they don’t overspend or withdraw too much, providing financial stability and control.
Benefits of a Systematic Withdrawal Plan
Let’s have a look at the benefits of the best systematic withdrawal plan below.
Tax Benefits
- Capital Gains Tax: When you set up an SWP, you have control over the timing and amount of your withdrawals. You can spread your withdrawals over multiple financial years to stay within the lower tax brackets, potentially reducing the tax impact.
- Dividend Distribution Tax (DDT): Some mutual fund schemes, such as equity-oriented funds, may not have a Dividend Distribution Tax when you opt for a systematic withdrawal plan compared to receiving regular dividends. This can result in tax savings for investors.
We’ll explore more about taxation on SWP later in the article.
Rupee Cost Averaging
- Reduced Market Timing Risk: A systematic withdrawal plan reduces the need for trying to time the market. Instead of attempting to sell at the right market peak, an SWP scheme allows you to stick to a disciplined withdrawal strategy, potentially mitigating the risk associated with market volatility.
- Risk Mitigation: Withdrawing a fixed amount on a regular basis may help reduce the risk of selling a large portion of your investments when the market is down. This could prevent your portfolio from losing significant value during market declines. However, it’s important to approach this strategy with caution.
Effective Ways of Using SWP
Below are some effective strategies for utilising a SWP:
- Establishing a Steady Secondary Income Stream: In today’s economic market, having an additional income source is essential to cope with the cost of living. Investing in mutual funds and utilising SWP may enable the creation of a consistent secondary income.
- Building Your Own Retirement Fund: Regardless of whether you have an existing pension plan, you can construct a corpus approximately five years before retirement and allocate it into a mutual fund scheme based on your risk appetite. Upon retirement, initiating an SWP may allow you to generate your own pension fund.
- Capital Preservation: Rather than redeeming your entire mutual fund investment at once, a SWP scheme allows you to withdraw your investment in a structured manner. This approach ensures that a significant portion of your portfolio remains invested over the long term, enabling it to grow.
Does SWP in Mutual Funds Work Best for Retirees?
SWP in mutual funds may offer retirees an ideal solution for their financial needs during retirement. As retirees seek a reliable income source, they can utilise their retirement savings or gratuity and select the right mutual fund schemes to set up an SWP plan. It’s akin to creating a customised pension plan that aligns with your specific financial requirements. Moreover, just as a SIP spreads the cost of purchase, the SWP mutual fund scheme evens out the cost of withdrawals. This makes SWP an invaluable tool for retirees seeking financial stability during their golden years.
Difference Between SIP and SWP
Let’s look at the difference between SIP and SWP.
| Basis | Systematic Investment Plan (SIP) | Systematic Withdrawal Plan (SWP) |
|---|---|---|
| Definition | A SIP is a method of investing a fixed amount in a mutual fund scheme at regular intervals. | A SWP is a method of withdrawing a fixed amount from a mutual fund scheme at regular intervals. |
| Purpose | To build a disciplined investing approach over the long-term. | Provides the investor with a scope of a regular income stream. |
| Investment | You invest a fixed amount at regular intervals (monthly, quarterly, etc.). | You withdraw a fixed amount at regular intervals (monthly, quarterly, etc.). |
| Tax | Tax on SIP is applicable when your mutual fund units are redeemed. | The tax is calculated only on the capital gains component of each SWP instalment. Similar to SIP, the tax depends on the fund type and its holding period. |
| Suitability | Suitable for long-term wealth creation, especially for investors with a disciplined approach. | Ideal for retirees and senior citizens primarily. |
Taxation on SWP
SWP can be impacted by taxation. One must understand the impact of tax on the selected mutual fund before making an investment decision.
In case of withdrawal from the equity funds, a short-term capital gains tax of 15% will be applied if the funds are withdrawn within one year. Additionally, an exit load, determined by the fund house, will be charged on redemptions made within this period. On the other hand, after one year, a long-term capital gains tax of 10% is applied on gains exceeding Rs. 1 lakh without the benefit of indexation.
If the withdrawal is from a debt fund, it’s obvious that the taxation policy will be different from equity funds. In a debt fund, if redeemed within 3 years, short-term capital gains are taxed at the investor’s applicable slab rate. For redemptions after 3 years, long-term capital gains are taxed at 20% with the benefit of indexation (assuming the investor is a resident of India). These tax rates are subject to an additional surcharge and the applicable health and education cess.
Investors can choose any mutual fund scheme that matches their risk tolerance and opt for a Systematic Withdrawal Plan (SWP). Just as an SIP promotes disciplined investing, a SWP creates a disciplined withdrawal approach, enhancing the investor’s overall investment journey.
Here is a short summary of the taxation on different types of funds:
| Type | Short-Term Capital Gains Tax | Long-Term Capital Gains Tax |
| Equity Mutual Funds | 15% | 10% without any indexation |
| Balanced Mutual Funds | 15% | 10% without any indexation |
| Debt Mutual Funds | Depends on the tax slab | 20% without any indexation |
Factors to Consider Before Investing in SWP in Mutual Funds in India
Before you choose the best systematic withdrawal plan (SWP) and jump into investing, it’s crucial to consider the following key factors.
Financial Goals
The first step is to clearly define your financial goals and the purpose of the SWP. Determine whether you need the SWP for regular income, such as retirement, or for a specific financial goal. This may help you select the best SWP mutual funds that align with your objectives, particularly if you are seeking the best SWP for monthly income or the best SWP for senior citizens.
Market Condition
It’s crucial to consider market conditions before investing in the best SWP mutual fund. Since SWP investments are sensitive to market fluctuations, current and expected future market conditions impact returns. Therefore, it’s essential to research market conditions and macroeconomic factors, as these influence stock markets in India and globally. If you’re unsure how to invest in SWP mutual fund, assessing these factors can help you make an informed decision.
Exit Load and Expenses
When selecting a mutual fund for an SWP, it’s important to look for funds with a minimal exit load and a low expense ratio. This can help maximise the returns you receive from your systematic withdrawals and ensure your investment objectives are met efficiently. The SWP interest rate and related expenses should also be evaluated carefully to find the best SWP funds or best fund for SWP that suit your financial needs.
Tax Implications
The tax implications of your SWP, such as capital gains tax and dividend distribution tax, can impact your overall returns. Opting for tax-efficient funds can help maximise your SWP return. When reviewing the SWP mutual fund list, consider funds that offer tax efficiency to further enhance your returns from your SWP scheme.
To Wrap It Up…
To conclude, a Systematic Withdrawal Plan is a financial tool that offers many benefits. From providing a regular income stream to enabling disciplined withdrawals while keeping investments intact, SWP has got you covered. However, it’s essential to tailor your SWP investment strategy to your specific goals and consult a financial expert before investing in this plan.
Frequently Asked Questions About SWP
The SWP full form in mutual funds is Systematic Withdrawal Plan. A systematic withdrawal plan is an investment strategy in which you can withdraw a fixed amount of money from your mutual fund holdings at a predetermined interval.
Fixed Deposits (FDs) may provide stability and fixed returns, while SWP potentially offers flexibility, allowing adjustments to withdrawals as needed. Therefore, it is crucial to evaluate your specific needs to determine which option is better for your investment strategy.
Investors who need a regular income stream from their mutual fund investments, such as retirees, pre-retirees, and those with other financial obligations, can consider investing in the best mutual fund for SWP. Additionally, investors with high tax brackets and those seeking capital protection can find SWP a suitable option.
In an SWP plan, investors have the flexibility to choose the amount, frequency, and withdrawal date. Therefore, investors can stop the SWP at any time or add further investments.
A Systematic Withdrawal Plan (SWP) is the opposite of a Systematic Investment Plan (SIP). With a SIP, you invest money at regular intervals, while with a SWP, you withdraw a fixed amount at regular intervals. Both serve different purposes and largely depend on what you want to do.
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