What is a Systematic Withdrawal Plan?
If investors want regular cash flow from their investments the automatic choice for many is bank fixed deposits or postal deposits. However, declining interest rates on these schemes have made investors worry about their future income needs. Mutual funds have a solution for this, called SWP. What is SWP in a mutual fund? SWP or systematic withdrawal plan is a mutual fund investment plan, through which investors can withdraw fixed amounts at regular intervals, for example – monthly/ quarterly/ yearly from the investment they have made in any mutual fund scheme.
The investors need to choose the Month/ Quarter/Year for the systematic withdrawal. In the case of a Systematic Withdrawal Plan, Units are sold as per the desired withdrawal amount, on the specific date chosen by investors and the same amount is credited to the investors' accounts by the AMC.
How does SWP Work?
Suppose, we invested Rs 1 crore in a mutual fund scheme at Nav of Rs 100 on 1st April 2021 and we have decided systematic withdrawal of Rs 60,000 per month from the desired scheme on 1st April 2022. We are starting the SWP after a year, so all the withdrawals will have tax implications of long-term capital gains (LTCG).
Disclaimer: The table above is purely illustrative. Mutual fund NAVs are subject to market movements. You should consult with your financial advisor before planning your SWP
Key Benefits of SWP:
Regular flow of income: Through SWP, investors can make regular withdrawals from his/her existing investment. It helps you to redeem your investment into actual cash flow
Good option for retirement plan: SWP is possibly a good facility for your retirement as it helps you to redeem regular cash flow from your existing investment.
Ongoing Investments: While SWP withdraws a fixed amount regularly from your existing investment, your remaining amount remains invested and gives you a chance to seek a better return
SWP VS Dividends
· In the case of SWP, the cash flow is regular with a fixed desired amount which gets credited to the investor account as long as you have sufficient units in the fund.
· In the case of dividends, the cash flow is not fixed. It is at the discretion of the fund manager and AMC. It is as and when dividends are declared it gets credited to the client's account. And sometimes it may not be even declared.
· In the case of SWP, the liability of Tax is very less compared to dividend options. In SWP, Units are redeemed and investors are paid the amount. So the tax calculation is done on the profits on units sold and not on the complete amount received. In the case of units sold before one year, it attracts a short-term capital gains tax of 15 % on the profit generated after selling units and for long-term capital gains we have one lac of tax-free income from equity-oriented schemes and after that, the gains are taxed at 10 % of the profit.
· In the dividend option, whatever dividend is received in investors' hands is taxable as per their individual tax slabs.
Balanced Advantage Funds can be a good option when going for a Systematic Withdrawal Plan.
Balanced Advantage funds are hybrid mutual funds which are also known as Dynamic Asset Allocation Funds. In a Balanced Advantage fund, the asset allocation between the two asset classes - equity and debt - is managed dynamically depending on the prevailing stock market conditions.
At Market peaks, Balanced advantage funds have lesser allocations towards equity. As a result, they see smaller drawdowns during market corrections or else more amount of units are sold, so as to credit investors account with the desired amount of SWP.
Balanced Advantage Funds usually enjoy equity taxation. Equity taxation, especially long-term capital gains taxation makes SWP from Balanced Advantage Funds very tax efficient.
Here’s an illustrative example for you of Kotak Balanced Advantage Fund :
Total Value i.e. Total Withdrawal + Current Value (a + b) ~ ₹1.3 crores
Total returns from Sep 2018 to Jun 2022 are 8.6%^
Disclaimer: The above example is used to understand the concept. Actual returns may vary. Mutual fund NAVs are subject to market movements. You should consult with your financial advisor before planning your SWP.
I hope this helps you make an informed decision for you and this feature of the Systematic Withdrawal Plan helps you with your need for regular cash flow.
Investors should consult with their financial advisors about which SWP withdrawal option will be suited for their investment needs.
Mutual Fund Investments are subject to market risk, read all scheme-related documents carefully
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