What is SWP as a concept

What is Systematic Withdrawal Plan?

Systematic Withdrawal Plans(SWP) is a mutual fund investment solution which gives fixed cash-flows at regular intervals. You can specify the amount, the intervals (e.g. monthly, quarterly, annual etc.) and day of the month, quarter etc., when SWP takes place and the amount credited to your bank account.

How does SWP work?

• You need to have an investment in the mutual fund scheme from which the SWP will take place. The investment can be made either in lump sum or through Systematic Investment Plan (SIP) over a period of time.


• In order to generate the cash-flows for SWP, the asset management company will redeem units of the scheme from your folio.


• The number of units redeemed will depend on the SWP amount specified by you and the prevailing NAV. For example, if you want withdrawal of Rs 10,000 per month from your folio and the scheme’s Net Asset Value (NAV) on the day of withdrawal is Rs 100, then number of units redeemed will be Rs 10,000 ÷ Rs 100 = 100 units.


• For every SWP instalment (e.g. monthly, quarterly, annual etc.), units of the scheme will be redeemed to generate the cash-flows. So your unit balance will keep diminishing over time.


• Your SWP will continue as long as you have sufficient unit balance for the next SWP withdrawal.

Example of SWP

Let us assume you invested Rs 10 lakhs in a mutual fund scheme. The purchase NAV was Rs 20; so 50,000 units will be allotted to you. Let us assume you start a monthly SWP of Rs 6,000 after some time. Please note that all the figures in this example are purely illustrative. For the sake of simplicity, we have ignored exit load. Let us see, how the SWP will work.

• In the first month of the SWP, the scheme NAV is Rs 25. In order to generate Rs 6,000 for you, the AMC will have to redeem, Rs 6,000 ÷ Rs 25 = 240 units. Your unit balance will be 50,000 units – 240 units = 49,760 units.


• In the second month, if the NAV is Rs 27. The AMC will have to redeem, Rs 6,000 ÷ by Rs 27 = 222.22 units. Your unit balance will be 49,760 units - 222.22 units = 49,537.78 units.


• In the third month if the scheme NAV is 28. The AMC will have to redeem, Rs 6,000 ÷ Rs 28 = 214.28 units. Your unit balance will be 49,537.78 units - 214.28 units = 49,323.49 units.


• You started with 50,000 units, but after the third SWP withdrawal, your unit balance will be down to 49,323.49 units.


• What is the value of your investment after the third withdrawal? Value of investment = NAV X Unit Balance = Rs 28 X 49,323.49 units = Rs 13.8 lakhs.

Disclaimer: All the figures in this example are purely illustrative for investor education purposes only. Units redeemed for SWP and investment value will depend on market movements and prevailing NAVs of the scheme. s. You should consult with your financial advisor before investing.

SWP versus IDCW

Both SWP and IDCW (formerly known as dividend option) provide cash-flows to investors. However, there are important differences between the two:-

1. Mutual fund IDCW (formerly known as dividends) payments are not guaranteed. The AMC may decide to change the payout rate or even stop IDCW for a period of time at their discretion.


2. In SWP, you will continue to receive fixed cash-flows at regular intervals till you have sufficient unit balance of the SWP scheme in your folio.


3. Mutual fund IDCW (or dividends) payments from either equity or debt oriented schemes will be added to the investor’s taxable income and taxed as per the income tax rate of the investor.


4. SWP withdrawals with be subject to capital gains taxation. We will discuss SWP taxation in the next section. Suffices to say, at this stage that SWP taxation over long investment tenures is more advantageous for investors in the higher tax brackets compared to dividend taxation.

SWP Taxation

Profits made in withdrawals within 12 months from the date of investment in equity oriented funds (equity allocation more than 65%) will be subject to short term capital gains tax. Short term capital gains in equity oriented funds are taxed at 15% plus applicable surcharge and cess. Profits made in withdrawals made after 12 months from the date of investment in equity oriented funds will be subject to long term capital gains tax. Long term capital gains in equity oriented funds are tax free upto Rs 1 Lakh in a financial year and thereafter taxed at 10% plus applicable surcharge and cess.

Profits made in withdrawals made within 36 months from the date of investment in non-equity or debt oriented funds (equity allocation less than 65%) will be added to your taxable income and taxed as per your income tax rate. Profits made in withdrawals made after 36 months from the date of investment in non-equity or debt oriented funds will be subject to long term capital gains tax. Long term capital gains in non-equity or debt oriented funds are taxed at 20% plus applicable surcharge and cess after allowing indexation benefits.

Things to keep in mind when planning SWP

• You should have moderate withdrawal rates if you want to continue your SWP for a long period of time.


• If your annualized withdrawal rate is lesser than the average return on investment, you can get both regular cash-flows and capital gains from your SWP over sufficiently long investment tenures.


• You should be mindful of exit loads when planning your SWP. Exit load is a charge levied on withdrawals made within the exit load period. Financial advisors usually recommend investors to begin their SWP after the exit load.


• You should be mindful of taxation when planning your SWP. If you want to avoid short term capital gains taxation, you should begin your SWP after the short term capital gains period i.e. 12 months or more for equity oriented funds and 36 months or more for non-equity or debt oriented funds.


• You should always invest in schemes according to your risk appetite and investment needs.

You should consult with your financial advisor to discuss which mutual fund scheme may be suitable for SWP basis your risk taking appetite and investment time horizon.