What is Systematic Withdrawal Plan?

If creating wealth is on your mind, then you might have to first start financial planning. Financial planning helps investors ask all the right questions so that they are able to take an informed investment decision. For example, through financial planning an investor is able to understand the primary objective behind their investment, their investment horizon, and can also determine their risk appetite.

If you are building an investment portfolio, it is better to diversify your portfolio so that it helps you in balancing the overall investment risk. If you are one of those who don’t want to invest in financial products that offer low fixed interest rates and is keen on seeking capital appreciation through investments in market linked schemes, you can consider investing in mutual funds.

What are mutual funds?

Mutual funds are a pool of professionally managed funds where the fund manager actively buys/sells securities in accordance with the scheme investment objective. What AMCs do is that they collect money from investors sharing a common investment objective and invest this pool of funds across the Indian economy. The money is invested across multiple asset classes depending on the nature of the scheme. The performance of a mutual fund depends on the performance of its underlying assets and the sectors/industries/economies it invests in.

Asset Management Companies hire fund managers, who carry a vast industry experience, for actively managing mutual funds. It is the duty of these fund managers to buy and sell securities to help the scheme achieve its goal. Hence, even if you are someone who lacks in depth knowledge about how the market functions, you too can consider investing in mutual funds.

If you remain committed to your mutual fund investments held over the long term, your investments have the potential to beat market volatility as well as inflation. Also, when you invest for the long term, thanks to the power of compounding, your small investment amounts might even turn into a decent corpus. Mutual funds allow investors to invest in multiple asset classes through just one single investment. Most mutual funds do not come with a lock-in period. This means investors can partially or fully withdraw their fund units according to their own convenience. You do not need to remain committed to your investments.

In case the mutual fund you invested in is underperforming, you can stop investing in that fund and move to a better performing mutual fund.

What is SWP (Systematic Withdrawal Plan)?

Financial planning is essential not just while making an investment but also while withdrawing the accumulated sum. A Systematic Withdrawal Plan, abbreviated as SWP, allows investors to withdraw in a systematic manner. It is just like SIP, but in SIP an investor invests in mutual funds systematically and in SWP an investor withdraws systematically at regular intervals. The best part about SWP is that the investor can decide how much money they want to withdraw periodically, at the same time continue investing in a particular mutual fund scheme.

Is SWP a better pay-out option than IDCW?

SWP allows investors to systematically withdraw their money from mutual funds. In SWP, investors are eligible for a predetermined amount. In case of IDCW pay-outs, they can only be made available by the fund manager when the scheme performs. If you are an individual who seeks regular income through their mutual fund investments, the option for an SWP might work in your favour. In case of IDCW pay-outs, the intervals at which investors will receive this is uncertain.

Are there any tax implications on SWP?

The tax implication on each SWP redemption is similar to what investors have to pay while redeeming their equity, debt, hybrid or any other mutual fund units. Equity mutual fund units redeemed before 12 months are eligible for short term capital gains. For debt fund investors, short-term capital gains tax is applicable for units held less than 36 months and long-term capital gains on units held for the long run.

Now that you know what a Systematic Withdrawal Plan is and how it works, plan on investing? Before going ahead and making the actual investment in any scheme do bear in mind the fact that mutual fund investments are subject to market risks. Hence, returns from these investments are never guaranteed. Retail investors are expected to make sure that their investment objective is always in sync with that of schemes they invest in. Also every investment scheme carries a different risk profile. So it is better if investors determine their risk appetite before entrusting their hard earned money in any scheme. Also, if you are keen on seeking capital appreciation through mutual fund investments, make sure that you keep a long term investment horizon. Also, if you feel that you still need further assistance before deciding where to invest, do seek the help of a financial advisor.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.