Systematic Withdrawal Plan

A Systematic Withdrawal Plan (SWP) is a service provided by mutual funds that allows investors to withdraw a set amount of money at regular intervals, such as monthly or quarterly, from their mutual fund investments.
Systematic Withdrawal Plan
3 min
04-July-2024

Did you know that at the end of the investment tenure, you do not always need to redeem all your mutual fund units in one go? Instead, you can also opt for a SWP in mutual funds. The full form of SWP is a ‘Systematic Withdrawal Plan.’ An SWP allows investors to withdraw a fixed amount regularly from a mutual fund. You can select the withdrawal amount and frequency, opting to withdraw only the gains while keeping the capital intact. This creates a consistent income stream, distributed monthly or annually.

Not sure what this means and how it works? Worry not, because, in this article, we take a closer look at the meaning of SWP, how it works and why it can be beneficial.

What is a Systematic Withdrawal Plan?

A Systematic Withdrawal Plan is an investment redemption strategy that is commonly used in mutual funds. Here, you withdraw only a fixed portion of your mutual fund corpus at periodic intervals. You can decide the percentage of the corpus that you want to redeem as well as the frequency at which you want to redeem it.

This is different from traditional investment redemption, where you sell all your mutual fund units at one go and withdraw the entire corpus as a lump sum. When you opt for a SWP in mutual funds, you can choose to withdraw a fixed number of units at periodic intervals or a fixed percentage/amount of your capital. For example, say you have a mutual fund corpus of Rs. 5 lakhs, and the fund earns 12% returns on average per year. If you implement a SWP to withdraw Rs. 50,000 annually, then, at the end of the first year, the fund balance will be Rs. 5,10,000 (i.e. a growth of Rs. 60,000 or 12% coupled with a withdrawal of Rs. 50,000).

Key takeaways

  • A systematic withdrawal plan (SWP) is a strategy to redeem your mutual fund investments systematically, by withdrawing a small portion of the corpus over an extended period.
  • It helps preserve the capital earned over the investment tenure and allows you to earn further returns on the balance corpus during the SWP period.
  • The amount you need to withdraw depends on your post-retirement financial requirements and the other investments you have accumulated by then.

How does a SWP work?

A Systematic Withdrawal Plan is quite easy to set up nowadays. You can instruct your preferred mutual fund house or stock broker to set up a SWP for your investments from a specified date. You must also choose the withdrawal amount and the withdrawal frequency. Thereafter, the corpus built up over the investment tenure will be withdrawn systematically as per your instructions and credited to the bank account provided.

Let us discuss an example to further understand how SWPs work. Suppose you have a total investment of Rs. 10 lakhs in mutual funds, divided into 1,00,000 units of Rs. 10 each. You decide to redeem Rs. 5,000 per month. Here is how your SWP will work out during the next six months.

Month

NAV per unit

SWP Amount (Rs.)

Units Redeemed

Units Left

Month 1

10.30

5,000

485

99,515

Month 2

9.70

5,000

515

99,000

Month 3

11.50

5,000

434

98,566

Month 4

12.30

5,000

406

98,160

Month 5

10.60

5,000

471

97,689

Month 6

9.80

5,000

510

97,179

 

Advantages of a Systematic Withdrawal Plan

If you are unsure about choosing between a lump sum withdrawal and a SWP in mutual funds, let us explore the benefits of the latter. This will help you make an informed choice.

  • Suitable in a bull market
    If the market is bullish at the end of your investment tenure, a SWP can help you capitalise on the upward price movements while still redeeming a part of your corpus. The mutual fund units that are yet to be redeemed will continue to accumulate and appreciate because of the bullish run.
  • Supports disciplined withdrawals
    Choosing to withdraw small sums periodically can foster investment discipline. It prevents impulsive lump sum withdrawals and helps you avoid spending the entire capital in one go. Since you only have access to your funds in small amounts, you can use the money more prudently.
  • Gives you a predictable income
    Opting for a Systematic Withdrawal Plan can give you access to a steady stream of income. This can act as supplementary income if you are still working. Alternatively, it can help replace a part of your primary income when you retire. All the while, your unredeemed mutual fund investments may continue to grow based on the market movements.
  • Helps avoid timing the market
    If you choose to make a lump sum withdrawal, you need to study the market and pinpoint the ideal time to exit your mutual fund investments. If the market rises after the mutual fund redemption, you may suffer from seller’s remorse. Timing the market can also be tricky and incredibly challenging. By choosing an SWP instead, you avoid all this hassle.
  • The benefit of rupee cost averaging
    Like SIPs, SWPs also give you the benefit of rupee cost averaging because you will likely redeem your mutual fund units at varying high and low prices over several months or years. During favourable phases in the market, this can have the effect of increasing the overall average sale price per unit, thus increasing your net returns.
  • Tax Benefits
    When you redeem your mutual fund holdings via a SWP, you may earn capital gains on the redemption. These capital gains are taxed based on the type of mutual funds redeemed and their period of holding. W.e.f April 1, 2023, the classification of mutual fund profits as long-term or short-term capital gains and the taxation rules involved are as follows:

Type of Mutual Fund

Short-Term Capital Gains (STCG)

Long-Term Capital Gains (LTCG)

Taxation

Equity funds and aggressive hybrid funds that invest over 65% in equity

If held for less than 12 months

If held for 12 months or more

STCG is taxed at 15% and LTCG is taxed at 10% without indexation benefits

Debt funds and conservative hybrid funds that invest 35% or less in equity

No effect of the holding period on the classification or taxation of the capital gains earned

All capital gains are taxed at the income tax slab rate applicable to the investor

Other funds that invest more than 35% but less than 65% in equity)

If held for less than 36 months

If held for 36 months or more

STCG is taxed at the income tax slab rate applicable and LTCG is taxed at 20% with indexation benefits

 

Who can benefit from a systematic withdrawal plan (SWP)?

For those seeking a regular source of secondary income

If you are looking to create an additional income stream from your long-term investments, a Systematic Withdrawal Plan (SWP) could be an ideal solution. By investing in mutual funds and setting up an SWP, you can withdraw a fixed amount of money at regular intervals, such as monthly or quarterly. This can help you manage the rising cost of living and ensure a steady flow of secondary income.

For those focused on capital protection

Risk-averse investors can benefit from SWPs by choosing moderate or low-risk mutual fund schemes. With this approach, you can withdraw only the capital gains, leaving your principal investment relatively untouched. For example, if you invest in an arbitrage fund, you can receive the capital appreciation regularly through an SWP, while your initial investment remains at almost zero risk.

For those wanting to create their own pension

If you don't have a pension plan, you can create your own pension using an SWP. By investing your retirement corpus in mutual funds that match your risk profile, you can withdraw a regular income at a frequency that suits you. This way, you can start an SWP upon retirement and enjoy a steady income stream, effectively creating your own pension.

For those in a high tax bracket

High-income investors often find SWPs advantageous because there is no Tax Deducted at Source (TDS) on the capital gains. Additionally, the capital gains from equity or equity-oriented funds are taxed at a moderate rate. Gains from debt-oriented funds also benefit from moderate taxation due to the allowance of indexation on long-term capital gains.

Effective uses of an SWP

You can use a systematic withdrawal plan for various purposes such as:

  • Pension benefits: You can use the period withdrawal amounts as a substitute for or addition to your pension income after you have retired. The amount withdrawn periodically can help you meet your everyday expenses and ensure that you can maintain the required standard of living even after you retire.
  • Securing an additional source of income: Even if you have not retired, having an additional source of income during your working years can be a convenient financial cushion. The periodic income via your SWP can help you pay off your debts faster or add to your household income in other ways.
  • Capital protection: Withdrawing your mutual fund investments through a SWP helps protect your capital during the withdrawal phase. You can move the remaining corpus to a stabler option like arbitrage funds or debt funds and ensure that the wealth created remains intact even during the withdrawal period.

Should you opt for a SWP?

A Systematic Withdrawal Plan may not be suitable for all investors. However, it may be a good choice for you if you:

  • Need a regular stream of income
  • Want to manage market risks using regular withdrawals
  • Want to maintain some investment exposure while also withdrawing a part of your corpus
  • Are looking for flexibility in your investment withdrawals
  • Want to transition smoothly from investments to redemption
  • Want to continue to benefit from a bull market

Conclusion

Now that you know the meaning of SWP in mutual funds, how it works and why it is beneficial, you can decide whether this strategy is suitable for you. This withdrawal strategy is very similar to the Systematic Investment Plan (SIP), in which you invest in mutual funds at regular intervals. If you are just getting started with mutual funds, a SIP calculator can help you create an effective investment strategy.

You can also check out the 1,000+ mutual fund schemes available on the Bajaj Finserv Mutual Funds Platform. To find the scheme that is best for you, you can compare mutual funds, understand their features and benefits and make an informed decision. If you have a large amount of liquid capital in hand, you can even make a lump sum investment in any mutual fund.

Essential tools for mutual fund investors

Mutual Fund Calculator

Lumpsum Calculator

SIP Calculator

Step Up SIP Calculator

SBI SIP Calculator

HDFC SIP Calculator

Nippon India SIP Calculator

ABSL SIP Calculator

Tata SIP Calculator

BOI SIP Calculator

Motilal Oswal Mutual Fund SIP Calculator

Kotak Bank SIP Calculator

Frequently asked questions

What is the meaning of SWP In mutual funds?

An SWP in mutual funds is the process of systematically redeeming or withdrawing your mutual fund units in a regular and planned manner.

Is SWP a good option for me?

A systematic withdrawal plan may be suitable for you if you do not need to withdraw your entire investment at one go and you want to continue to benefit from market-linked returns while also redeeming a few units periodically.

What is the 4% SWP rule?

According to the 4% SWP rule, you should withdraw 4% of your mutual fund corpus in the first year of redemption. Then, each year, you need to withdraw the same sum after adjusting it for inflation.

Are SWPs tax-free?

No, SWPs in mutual funds are not tax-free. The tax benefits, if any, depend entirely on the type of fund and the period of holding.

What is the rate of return from a SWP?

There is no specific rate of return linked to a systematic withdrawal plan. The returns from your mutual fund investments depend on the performance of the assets in the fund’s portfolio.

Is there any risk in SWP?

Some of the limitations of SWPs in mutual funds include continued exposure to market risk, inflation risk and longevity risk, which is the possibility that the funds may be exhausted sooner than expected.

What are the disadvantages of a SWP?

A Systematic Withdrawal Plan is generally beneficial. However, if the NAV is declining, you may need to redeem or liquidate more fund units to ensure your withdrawal preferences are met.

Is a Systematic Withdrawal Plan risky?

No. On the contrary, a Systematic Withdrawal Plan is designed to help you manage risks. It helps you earn further returns on the remaining corpus and minimises the risk of timing the market.

What are SWP interest rates?

There are no fixed interest rates in SWPs. The mutual fund units remaining after each withdrawal may grow or lose value depending on how the underlying assets in the fund perform.

Can a SWP be stopped or modified at any time?

Yes, you can modify your Systematic Withdrawal Plan at any time to increase the withdrawal amount or rate. You can even stop your SWP or make additional investments.

Which is better: a SIP or SWP?

A Systematic Investment Plan (SIP) is the opposite of a Systematic Withdrawal Plan (SWP). If you are still in the process of building a retirement corpus and creating wealth, a SIP can help you achieve your goals in a disciplined manner. Alternatively, if you are closer to retirement or have already retired, a SWP can offer you a regular stream of income.

How do I choose between FD interest and SWP payouts?

Fixed deposits offer fixed interest on the amount deposited. If you have a lump sum amount to invest today, FDs can help you earn steady income in your post-retirement years. SWPs can also be considered as a supplementary income source as they offer variable payouts depending on the investment value.

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Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.