What is Systematic Withdrawal Plan in Mutual Fund?
Where
SIP allows you to invest regularly a fixed sum in a mutual fund scheme; SWP, on the other hand, helps you to withdraw from your investments. In other words, SWP is the opposite of SIP, the only similarity being that both are done in small chunks of money (depending on Fund Houses) and at periodic intervals like monthly, quarterly etc.
What is SWP?
SWP is a facility provided by
mutual fund houses under which you can periodically withdraw a specified amount from your existing portfolio to meet your expenses.It can be availed as per your need of regular cash inflow by filling up the relevant form that specifies your folio number, date of first withdrawal, frequency of withdrawal and amount with bank details.
SWP can be of two types-
- Fixed amount SWP- Here, you fix the amount to be withdrawn on the date specified
- Appreciation SWP- Here, you withdraw only the appreciation or gain from the scheme, i.e. the returns you have earned and not the principal amount.
What are the scenarios where you may need SWP?
Income after retirement: One of the common uses of SWP, is when you access your retirement fund to generate regular income for yourself.
Complementing/in place of current income source- Consider a scenario wherein you have quit your regular source of income, and are, perhaps, trying to establish yourself as an entrepreneur, or due to layoffs, you lose your job. In both cases, you will need regular income to sustain the lifestyle for yourself and your family.
Achieve your financial goals- An SWP can help you achieve your financial goals. For example, if your goal is to generate a fixed monthly income, an SWP can help to achieve that for you.
Family emergency- Life is unpredictable, and no matter how tightly you plan your finances, there may always be room for surprises you did not plan for. If such a situation warrants additional money, SWP can be a comfortable option.
Similarly, there can be many scenarios that are subjective, and that may require you initiating an SWP.
Deep Diving into SWP
With the help of an example, let us understand the mechanism of SWP.
Let us assume you have Rs. 1,00,00,000 in a debt schemeas on today with an NAV of Rs. 10, i.e. 10,00,000 units. Assuming returns per annum of 6%, monthly returns will be 0.5%. Let us assume you want to initiate a monthly SWP of Rs. 10,000 from next month onwards, here is the mathematics behind the withdrawal-
| NAV | SWP value (Rs) | No of units redeemed | No of units remaining | Investment Value at end of the periode(Rs) |
|---|
| 10.0000 | - | - | 10,00,000 | 1,00,00,000 |
| 10.0500 | 10,000 | 995.0249 | 9,99,004.9751 | 1,00,40,000 |
| 10.000 | 10,000 | 990.0745 | 9,98,014.9006 | 1,00,80,200 |
| 10.000 | 10,000 | 985.1488 | 9,98,017.7519 | 1,01,20,601 |
With a 0.5% return, at the time of the first SWP instalment, your NAV grew from Rs. 10 to Rs. 10.05. This implies that if you want to withdraw Rs. 10,000, you shall have to redeem (10,000/10.05)=995.0249 units of the scheme. After this redemption, you are left with 999,004.9751 units and so on for every SWP redemption.
The choice of the SWP value may depend on your total portfolio value and your monthly/quarterly cash inflow requirement. The above example is just an assumption for the sake of calculation and is not a recommended SWP value.
What’s in it for a mutual fund investor?
Regular Cash Inflow
Tax-related Benefits Taking the same example forward, did you wonder if you will get the whole of Rs. 10,000 each time you redeem the units? The good news here is that there is no TDS implication for the SWP amount for a resident investor.
Also, depending on the tenure of holding of the scheme, Short-Term Capital gains Tax (STCG Tax) or Long-Term Capital gains Tax (LTCGTax ) shall be applicable.
Furthering the example we discussed above, let us assume that the period of holding of the investment in the said debt fund is less than36 months. In which case, STCG Tax of 30% (excl. surcharge and cess) will be applicable on the capital gain (Assuming investor is in the highest income tax rate slab). Using the same numbers, the STCG Tax on the first 3 SWP instalment shall be-
| Month | NAV | Units | Value | SWP | Units redemption | Units remaining | Market Value | STCG | STCG Tax |
|---|
| - | 10.00 | 1000000 | 10000000 | | | 1000000 | 10000000 | | |
| 1 | 10.05 | 1000000 | 10050000 | 10000 | 995.02 | 999004.98 | 10040000 | 49.75 | 14.93 |
| 2 | 10.10 | 999004.98 | 10090250 | 10000 | 990.07 | 998014.91 | 10080250 | 99.30 | 29.79 |
| 3 | 10.15 | 998014.91 | 10130650 | 10000 | 985.14 | 997029.76 | 10120650 | 148.56 | 44.57 |
And so on. So, you are paying STCG Tax only on realized capital gain and not on the whole withdrawal amount.
In conclusion-
SWP can be the comfortable fallback option for you when you need that additional regular inflow of money to either help you live a peaceful retirement life, to complement your existing income or in any other subjective situation you may be in. It is advisable to speak to your financial advisor before making any SWP decision.
