A Systematic Withdrawal Plan (SWP) is an essential tool for Indian investors who seek regular income without compromising their corpus’ growth potential. Unlike the widely popular SIP, which helps accumulate wealth systematically, SWP enables you to withdraw a fixed amount at regular intervals. This blog will explore SWP’s working mechanism, benefits, tax implications, comparisons, and the best-performing funds in the Indian financial landscape
What is a Systematic Withdrawal Plan (SWP)?
A Systematic Withdrawal Plan (SWP) enables investors to withdraw a predetermined amount from their mutual fund investments at regular intervals. These intervals can be monthly, quarterly, semi-annually, or annually, depending on the investor’s preference. SWP ensures that you can maintain financial stability by generating consistent cash flow while keeping the remaining corpus invested.
For retirees, SWP offers an excellent way to receive a steady income post-retirement. It is also suitable for individuals looking to fund recurring expenses like tuition fees, loan EMIs, or medical bills.
How Does SWP Work?
SWP works by redeeming a specific number of mutual fund units from your investment at the current Net Asset Value (NAV). The number of units redeemed varies depending on the NAV on the withdrawal date. As the NAV fluctuates due to market conditions, the total value of your remaining corpus is impacted accordingly.
Example:
Suppose you have invested ₹1,00,000 in a mutual fund with an NAV of ₹50. You set up an SWP to withdraw ₹20,000 every month:
- First Month:
- NAV = ₹50
- Units Redeemed = ₹20,000 / ₹50 = 400 units
- Remaining Units = 2,000 – 400 = 1,600 units
- Second Month:
- NAV increases to ₹55
- Units Redeemed = ₹20,000 / ₹55 ≈ 363.64 units
- Remaining Units = 1,600 – 363.64 = 1,236.36 units
Over time, as units are redeemed, the total number of units decreases, impacting the remaining investment value.
Benefits of SWP
SWP offers several advantages, particularly in the Indian financial landscape:
- Regular Income Stream: SWP ensures a steady cash flow, which is especially beneficial for retirees or individuals who rely on their investments for recurring expenses.
- Flexibility: Investors can choose the withdrawal amount and frequency, making it easy to customize according to individual financial needs.
- Tax Efficiency: In India, withdrawals through SWP are subject to capital gains tax rather than income tax. This makes SWP a more tax-efficient option compared to traditional fixed-income instruments like fixed deposits (FDs).
- Rupee Cost Averaging: Since withdrawals happen regularly, SWP minimizes the impact of market volatility, similar to how SIP averages the cost of investment over time.
- Preservation of Corpus: Unlike fixed deposits, where the principal is entirely withdrawn at maturity, SWP allows you to keep the remaining corpus invested for potential growth.
Comparing SWP with SIP
While SWP and SIP are both systematic facilities offered by mutual funds, their objectives differ significantly.
| Feature | Systematic Investment Plan (SIP) | Systematic Withdrawal Plan (SWP) |
| Purpose | Wealth accumulation | Regular income generation |
| Cash Flow Direction | Inflow: Regular investments | Outflow: Regular withdrawals |
| Ideal For | Individuals in wealth accumulation phase | Retirees or individuals seeking cash flow |
| Tax Implications | Investment may qualify for tax exemptions | Withdrawals are subject to capital gains |
Key Insight: SIP helps you build wealth by investing systematically, while SWP helps you utilize that wealth systematically.
SWP vs ETFs vs Index Funds
Exchange-Traded Funds (ETFs) and Index Funds are other investment options often compared to SWPs. Here’s how they differ:
| Feature | SWP | ETFs | Index Funds |
| Nature of Investment | Regular withdrawals from mutual funds | Passively managed; trades like stocks | Tracks market index |
| Cash Flow | Regular income | No structured withdrawal plan | No structured withdrawal plan |
| Management | Actively managed | Passively managed | Passively managed |
| Liquidity | High | High | Moderate |
Insight: While ETFs and Index Funds focus on market tracking and portfolio diversification, SWP focuses on providing structured cash flow.
Top Performing SWP Funds in India
Recent market trends reveal some mutual funds that have delivered exceptional performance for SWP investors:
- Axis Bluechip Fund
- 5-Year Return (CAGR): 16.5%
- NAV: ₹41.78
- Risk Level: Moderate
- HDFC Hybrid Equity Fund
- 5-Year Return (CAGR): 15.8%
- NAV: ₹20.46
- Risk Level: Moderate-High
- Mirae Asset Emerging Bluechip Fund
- 5-Year Return (CAGR): 18.1%
- NAV: ₹74.89
- Risk Level: Moderate
Steps to Set Up an SWP in India
Setting up an SWP is straightforward and involves the following steps:
- Choose the Right Mutual Fund: Select a fund that aligns with your financial goals, risk tolerance, and income requirements.
- Specify Withdrawal Details: Decide on the withdrawal amount, frequency, and start date.
- Submit an SWP Application: Complete and submit the SWP form through your mutual fund distributor, investment advisor, or directly with the fund house.
- Monitor and Adjust: Regularly review your investment and make necessary adjustments to withdrawal amounts or funds based on market performance and personal financial goals.
Factors to Consider Before Opting for SWP
- Fund Performance: Evaluate the historical performance and consistency of the mutual fund before setting up an SWP.
- Market Volatility: Be prepared for fluctuations in the NAV, which can impact the value of the remaining corpus.
- Tax Implications: Understand the capital gains tax applicable to your withdrawals based on the type of fund and holding period.
- Withdrawal Rate: Avoid over-withdrawing, as it can deplete your corpus prematurely, especially during prolonged market downturns.
Taxation on SWP in India
In India, SWP withdrawals are subject to capital gains tax, which varies based on the holding period and type of mutual fund:
- Equity-Oriented Funds:
- Short-Term Capital Gains (STCG): Taxed at 15% if units are held for 12 months or less.
- Long-Term Capital Gains (LTCG): Tax-free up to ₹1 lakh; taxed at 10% thereafter.
- Debt-Oriented Funds:
- STCG: Taxed as per the investor’s income slab if units are held for 36 months or less.
- LTCG: Taxed at 20% with indexation benefits.
Pros and Cons of SWP
Advantages:
- Predictable Income: Provides regular cash flow for predictable financial needs.
- Tax Efficiency: Capital gains tax is often lower than the income tax applicable to traditional fixed-income instruments.
- Flexibility: Investors can modify withdrawal amounts or discontinue the SWP as needed.
Disadvantages:
- Corpus Depletion Risk: Excessive withdrawals can erode the principal, particularly in bearish markets.
- Impact of Volatility: Fluctuating NAV affects the value of remaining investments.
- Management Effort: Regular monitoring is essential to ensure long-term sustainability.
Systematic Withdrawal Plans (SWP) offer a unique blend of regular income and capital preservation, making them a valuable financial tool for Indian investors. Whether you’re a retiree seeking steady income or an individual managing recurring expenses, SWP can help you achieve your