Every individual has different financial goals and investment potential. Mutual funds have become the most preferred investment option among investors, given the various benefits it offers like being lighter on the wallet, variety of options, taxation benefits, etc.

Investment in mutual funds offers different routes like SIP or lump sum. Since every investor has a unique investment plan, some opt for lump sum investments, while others prefer to stagger their investments over time through the Systematic Investment Plan (SIPs) option.

SIPs are considered to be the hassle-free way to invest regularly in small amounts in the best suitable mutual funds over the long run. SIPs have been the go-to strategy for wealth creation and achieving long-term financial goals.

[Read: How to Choose Mutual Funds For Your Investment Portfolio]

However, when investing their hard-earned money, many investors seek capital growth, while others look for ways to generate regular income from their investments. Various mutual fund houses offer a range of instruments to meet the expectations of different types of investors.

One such facility is a Systematic Withdrawal Plan (SWP)…

What happens when you have accumulated a sizable nest egg by investing in mutual funds and now are ready to enjoy the fruits of your financial prudence? This is where Systematic Withdrawal Plans (SWP) step in.

Did you know that a Systematic Withdrawal Plan (SWP) is just as efficient to get regular income in your hands? In this article, we will discuss some important things you need to know about SWP in mutual funds.

What is SWP in mutual funds?

An SWP (Systematic Withdrawal Plan) option in mutual funds is an extended facility that enables you to withdraw money from your mutual funds in a systematic manner.

SWP allows you, the investor, to withdraw systematically on predefined dates from your mutual fund investments and hold the potential to clock returns on the remaining investments over a period of time. These withdrawals can occur annually, semi-annually, quarterly, or even monthly.

These withdrawals could be a fixed or variable amount, and SWP facilitates better planning of withdrawals as per your needs. It not only provides you with a regular source of income but also encourages a disciplined approach to managing your finances.

Here are some important features of a SWP in mutual funds:

  • Systematically cash in your investment units at regular intervals;
  • You can choose the amount, frequency, and start and end dates of the SWP plan;
  • You can either withdraw a fixed amount or only the capital appreciation;
  • Enables rupee-cost averaging;
  • The remaining investments/units would benefit from the power of compounding.

The main advantage of the SWP is that it could be an effective way to source your retirement needs.

How does SWP in mutual funds work?

Let us look at an example to understand how a systematic withdrawal plan works.

For instance, you have accumulated a sum of Rs 1,00,000 by investing in a mutual fund scheme over a period of time and want to withdraw a specific amount every month to maintain a regular flow of income.

Now, you decide to set up a SWP plan to withdraw Rs 10,000/- at a specific date of every month. The mutual fund’s Net Asset Value (NAV) is Rs 100/- per unit.

[Read: Follow These Steps to Set Up an SWP in Mutual Funds]

Additionally, when you set up a Systematic Withdrawal Plan (SWP), you instruct the fund house to release funds at regular intervals (usually monthly, quarterly, or annually). Therefore, these funds get transferred to your bank account automatically.

Now, let’s have a look at the SWP mutual funds return calculation process.

Months Mutual Fund NAV (in Rs) SWP Amount (in Rs) No. of units redeemed No. of units left Balance investment amount (in Rs)
April 100 1000 1,00,000
May 105 10,000 95 905 95,000
June 120 10,000 83 821 98,571
July 125 10,000 80 741 92,679
August 130 10,000 77 665 86,386
September 130 10,000 77 588 76,386
October 130 10,000 77 511 66,386
November 140 10,000 71 439 61,492
December 140 10,000 71 368 51,492
January 150 10,000 67 301 45,170
February 150 10,000 67 234 35,170
March 155 10,000 65 170 26,343

*This SWP mutual fund returns calculation is just for illustration purpose only, and should not be considered as recommendatory.
(Source: Data collated by PersonalFN Research) 

Thus, what SWP does is facilitate piecemeal withdrawals. As you can see, on each monthly withdrawal, the value of your investment in the fund is reduced by the market value (NAV) of the units that you have withdrawn, while the remaining mutual fund units will clock returns for you.

This way, you are in better control of your investment for your liquidity needs and do not have to depend on irregular sources of income. SWP is an efficient tool to earn regular income, especially for retirees.

One of the most important financial goals is planning for your retirement or golden years. The inflow of money would cease during retirement, but expenses would continue. Because you no longer have a regular source of income and have a finite amount of resources, your ability to compensate for increasing bills will be constrained.

Looking at the current scenario, filled with macroeconomic uncertainties and inflation fluctuations, etc., retirees may find themselves in a tough spot. A rise in inflation means your savings and fixed-income investments lose their purchasing power as time passes and the cost of goods and services goes up.

One way to keep inflation from affecting your ability to maintain your lifestyle in retirement and help you build an adequate retirement corpus is to invest in diversified equity mutual funds and opt for an SWP option post-retirement.

If you invest regularly in a suitable mutual fund scheme and accumulate a wealthy corpus in the initial years of your life leading up to your retirement, the SWP facility can be successfully triggered upon your retirement.

[Read: How the Proposed Systematic Lumpsum Withdrawal Option Can Benefit NPS Subscribers]

How retirees can benefit from SWP in mutual funds?

Regardless of whether you have a pension plan or not, opting for an SWP option, you can create your pension or a regular income source from your investments.

SWP gives you the ability to tailor the income flow at predetermined intervals and amounts. This ensures retirees have access to liquidity with definite regular income, irrespective of the market fluctuations.

SWP helps you maintain a disciplined approach towards withdrawals; it assists you in steering clear of withdrawing large amounts or liquidating the whole investment by panic selling in turbulent markets. SWP effectively safeguards your wealth for future expenses and counters inflation with the balancing units, ultimately earning you decent returns.

[Read: How Retirees Can Accelerate Their Portfolio Returns]

What are the Tax Implications for SWP in mutual funds?

Another reason why SWP is a wise investment strategy for retirees is, these withdrawals which are effectively redemptions, are not subject to tax deductions at source (TDS). The capital gains, though, are taxed on the withdrawn amount.

Keep in mind that the taxation for the SWP option will differ depending on whether you have chosen an equity-oriented or debt-oriented mutual fund scheme. Depending on the holding time for the scheme, it would be subject to Short-Term or Long-Term Capital Gains Tax.

On the other hand, the withdrawn amount is taxed on the capital gains.

Remember that the tax treatment of the SWP option will vary based on whether you choose a mutual fund scheme that is debt-or equity-oriented. The scheme would be liable to either short-term or long-term capital gains tax, depending on the holding period.

Things to consider while planning SWP in mutual funds…

Before you consider opting for a SWP plan, you must ensure investing in worthy mutual fund schemes that have the potential to yield returns that outpace inflation. When it comes to investing in mutual funds, the options can seem endless.

We have listed the top performing equity-oriented mutual fund schemes under various categories based on their 5 years CAGR returns, which you can check out. However, do note that investors may consider investing in any mutual fund scheme only as per their suitability based on risk profile, investment horizon and goals.

Table: Top-performing equity mutual fund schemes across various categories

Scheme Name Absolute (%) CAGR (%)
6 Months 1 Year 3 Years 5 Years 7 Years 10 Years
Quant Small Cap Fund(G)-Direct Plan 23.07 31.58 43.99 29.71 21.32 17.84
PGIM India Midcap Opp Fund(G)-Direct Plan 13.39 8.58 29.12 25.63 17.34
SBI Contra Fund(G)-Direct Plan 18.00 24.14 36.84 23.28 16.56 18.14
360 ONE Focused Equity Fund(G)-Direct Plan 15.49 18.39 23.58 23.02 16.72
Mahindra Manulife Multi Cap Fund(G)-Direct Plan 22.73 20.52 30.00 22.77
Quant Absolute Fund(G)-Direct Plan 8.46 4.55 25.82 21.87 16.55 18.79
Parag Parikh Flexi Cap Fund(G)-Direct Plan 14.96 21.82 23.56 21.58 18.26 19.48
Mirae Asset Emerging Blue chip (G)-Direct Plan 16.69 16.70 22.95 20.21 16.77 24.52

*Past returns are not indicative of future performance.
*These top-performing equity-oriented mutual funds are based on their 5 year CAGR returns performance track record.
Data as on October 25, 2023
(Source: ACE MF, data collated by PersonalFN Research) 

As you can see, an essential aspect of benefiting from this SWP option in mutual funds and making the most of it is planning the SWP effectively, while keeping your post-retirement needs in mind. If you make unplanned lump sum withdrawals, it can have a detrimental effect on your investments. Hence, in order to meet your liquidity needs, adhere rigorously to the SWP path you have selected.

Remember that there is no assurance that your investment capital will remain intact forever. You may end up dipping in your capital, if the rate at which you are withdrawing from your mutual fund plan is higher than the rate at which the scheme is growing. Therefore, for conservative or risk-averse investors, make sure your retirement investment basket includes traditional avenues like Fixed Deposits and Senior Citizens’ Savings Schemes and consider SWP in mutual funds as an add-on.

This article first appeared on PersonalFN here

Leave a Reply

Your email address will not be published. Required fields are marked *