What is SWP in Mutual Funds?

SWP is an abbreviation that stands for “systematic withdrawal plan.” Similarly to how you can automate your mutual fund investments, you can also automate withdrawals. You can get a certain amount of money every month at a set time. The sum can be either fixed or variable. SWP is most commonly used after retirement. SWP allows investors to withdraw monthly, semi-annually, quarterly, or annually.

If you want to invest in a mutual fund but want a steady flow of income, SWP is for you. You can use a systematic withdrawal plan to create a varied portfolio. This will assist you in achieving various financial goals. You can choose to invest across multiple asset classes or in a single fund with a focus on a specific asset class.

Let’s learn about SWP in Mutual Funds, what it offers, how it works, and so on.

What is SWP in Mutual Funds?

SWP in Mutual Fund allows investors to withdraw fixed sums from their current assets at regular intervals. A systematic withdrawal plan is the opposite of a SIP. It will enable you to create a plan to get a fixed amount from your mutual funds on a given date and at regular intervals. It lets you withdraw money in instalments instead of all at once.

With SIP, your monthly funds are invested in a mutual fund. On the other hand, when you select an SWP plan, you direct the money to your savings bank account rather than the mutual fund scheme. You can tailor your cash flow to your preferences and needs. This can be done by creating withdrawal plans on a monthly or quarterly basis.

Investors can withdraw a certain amount of capital gains from their mutual fund investment. You can reinvest that money or use it in its current cash form without making any changes. Let’s look at an example to help us understand better:

Let’s say you put Rs 100,000 into a mutual fund for a year and decided to take Rs 5,000 every single month from the MF. This means that Rs 5,000 will be deducted from your investment every month and returned to you. The amount of money still invested after each month has passed will continue to bring in profits from the investment.

Why is SWP (Systematic Withdrawal Plan) Necessary?

The ups and downs of the market have a direct effect on mutual funds. Especially when the date of maturity is getting close, the changes may hurt the NAV. The market is uncertain, and most mutual funds’ values change based on how the market is doing. 

So, if you want to get your money back in stages, the SWP plan is a good choice. When you are in a position where you require cash or have other needs, you can rest easy knowing that you will have access to the money. An SWP in a Mutual Fund is a good way to have a second source of income. Except for your monthly payment, it is also a good way to save money.

It provides you with a steady flow of income, whether monthly, quarterly, or annually. You can choose this duration based on your choice and the method you use to take the money.

How Does an SWP Work?

When you, as an investor, decide to use a system called an SWP plan (Systematic Withdrawal Plan), this decision will also impact the mutual fund account. It is essential to remember that opening an SWP account differs from opening an FD account, from which you will typically receive monthly interest. When you withdraw from an FD, the interest you get is deducted from your balance, but the principal remains unaffected. On the other hand, when you use SWP in mutual funds, the fund’s value goes down by the number of units you take out.

Benefits of Using SWP 

The following is a list of benefits that come with using the Systematic Withdrawal Plan:

Regular Income

SWP plan is designed to generate steady passive income for investors. Therefore, SWP is a cool option for people who need a steady income stream. This can help satisfy the ongoing financial needs of day-to-day activities. It gives you the added benefit of using cash to cover your money needs.

Flexibility

SWP brings flexibility to mutual funds. It allows you to choose the amount, timing, and frequency of the payments to meet your financial needs. You have the choice to pull out of a mutual fund investment at any time. You can also add more money to your holdings in the fund. You are free to withdraw any asset according to your specific choices, wants, and needs.

No TDS

In contrast to capital gains, the SWP does not involve any TDS, which is the finest feature of this plan.

Capital Appreciation

In most cases, the rate at which one can withdraw money from the SWP is lower than the rate at which one can earn money on those funds. It also gives you a chance to see your money grow over time.

Who Can Use SWP?

A Good Source of Income

It provides investors with a steady means of earning income. SWP can become your second source of income. This will be beneficial to you anytime you encounter a difficult financial situation.

It can assist you in covering other expenses, such as living costs. Investing in a long-term mutual fund scheme and taking a fixed amount out each month as an SWP is a great way to get a steady flow of income.

Individuals That Fall Into the Highest Tax Bracket

Because there is no TDS on capital gains, SWP can be beneficial to those in a high tax bracket. At the same time, equity-focused mutual funds have a more manageable capital gains tax rate.

Having the Desire to Establish Their Pension Plan

SWP plan is also ideal for investors who wish to establish their pensions by placing investments in the corpus mutual fund plan according to the level of risk they are comfortable with. It allows them to earn a consistent income that they can put toward the formation of their pension plan.

Conclusion

A mutual fund investor who takes the time to learn about the SWP plan will realise that it’s an intelligent way to ensure a steady cash flow. It is also possible to configure an SWP to allow withdrawals of only the fraction attributable to the accumulation of capital gains. The returns are tax efficient, and there is no TDS on profits, which significantly differs from most traditional investment options. To learn more about mutual funds and other investment options, visit Piramal Finance. They have many blogs and articles to improve your finance skills.