What Is SWP (Systematic Withdrawal Plan)? And How It Helps During Income Gaps?

Life doesn’t always follow a predictable financial path. There might be times when you’re between jobs, on a sabbatical, transitioning careers, or even retired. During such income gaps, having a reliable way to meet your monthly expenses without depleting your savings is essential. This is where Systematic Withdrawal Plans (SWPs) come into play.

If you are a mutual fund investor or a prospective one in the same, knowing the working of an SWP can provide you with that money agility. In this blog, we will let you know about what is SWP, how it works, comparison with SIP, and why it is a savvy choice in an irregular income era.

What Is SWP?

A Systematic Withdrawal Facility, or SWF, is a facility provided by mutual funds whereby the investor can withdraw a predetermined amount of money at regular time intervals—monthly, quarterly, or yearly—from his current mutual fund investment.

As opposed to a lump sum withdrawal of the entire investment all at once, an SWP lets you withdraw the money at regular intervals and hence is a suitable option for creating a steady income flow. The money that you withdraw is deposited into your bank account, and the rest of the investment still remains invested in the market and can potentially generate returns.
For those with income gaps or receiving living from investments, SWP provides discipline and stability.

How SWP Works?

It is easy to see how an SWP is done. If you have invested ₹10 lakhs in a mutual fund scheme, you can select that you want to withdraw ₹10,000 every month. On the given date, your mutual fund company will sell as many units of the mutual fund as will be needed to give you this amount based on the scheme's NAV on that day. The remaining amount is left invested.

Step-by-step explanation:

• Investment: You invest a lump sum amount in a mutual fund at one go.
• Set Withdrawal Amount: Decide on the amount of money you want to withdraw every month.
• Select Frequency: Monthly, quarterly, or yearly frequency of withdrawal.
• Fund House Sells Units: In order to make your withdrawal, the fund house sells units of the mutual fund at your selected value.
• Amount Credited: The cash is credited into your bank account.

You're essentially creating a reverse investment vehicle, just like you invest in SIP (Systematic Investment Plan), but instead of investing, you're withdrawing.
Do remember that every withdrawal could lead to capital gains tax, based on the type of mutual fund and duration of holding of the units.

SWP vs SIP: What's the Difference?

Both SIP and SWP are formal schemes offered by mutual funds, but for different purposes.

SIP is suitable for you during your working life, and SWP would be best suited when you need to live on your investments for a constant flow of income—particularly during your sabbatical or retirement from your professional career.

While considering SWP or SIP, investors can better plan their wealth-accumulation and wealth-withdrawal phase.

When To Use an SWP?

A Systematic Withdrawal Plan is useful in most life scenarios. Listed below are the common occasions on which an SWP will prove to be useful:

1. Retirement

SWP provides a monthly pension to retired individuals, just like a pension without compromising the total amount. For those who do not have a fixed pension, SWP for elderly citizens is an excellent alternative.

2. Career Break or Sabbatical

If you are temporarily unemployed for a brief or extended term, SWP keeps you enjoying a steady income without having to put other investments or savings on hold.

3. Freelancers and Consultants

Freelancers and consultants with irregular incomes can use SWP to create a steady flow of cash to meet necessary monthly needs.

4. Homemakers Managing Family Wealth

Homemakers who manage inherited or shared family investments may apply SWPs to raise liquidity without full liquidation.

Advantages of SWP in Pockets of Income

As you do not work and therefore do not earn a salary, an SWP can help you in the following way:

• 1. Fixed and Regular Income: It assists you in budgeting month by month with more certainty since a fixed sum is credited to your account each month.
• 2. Preservation of Capital: As compared to lump-sum withdrawal of the entire investment at one time, SWP keeps your money invested and grows it over a period of time.
• 3. Flexibility and Customisation: You can select the quantum, frequency, and even suspend or change the plan as desired. It provides far greater flexibility compared to conventional income-bearing instruments.
• 4. Tax Efficiency: SWPs are more tax-efficient than fixed deposits or interest-bearing securities, especially for long-term holding of equity mutual funds.
• 5. Does Not Make Emotional Redemption Decisions: Since your withdrawal is predetermined, you will not be making emotional redemption decisions during periods of market volatility.

How to set up a systematic withdrawal plan?

Making an SWP is very simple. Given below are the steps required to do the same:

• Choose the Right Mutual Fund Scheme: Better still, a hybrid or debt fund which is comparatively less volatile. Skip highly volatile equity funds if you don't have a high-risk appetite.
• Deposit a Lump Sum Amount: You would have to invest a large sum in the selected fund.
• Create SWP through the AMC or Platform: Contact the fund house or an online portal for initiating a request for a SWP.
• Set Parameters: Put down the amount and frequency (monthly, quarterly, yearly).
• Choose a Start Date: Select when you’d like withdrawals to begin.
• Monitor Periodically: While SWP is a process that runs automatically, look at it every 6-12 months to rebalance according to returns and cash needs.

Getting a glimpse of how to make a systematic withdrawal plan at an early stage may enable you to be financially more powerful during situations of future income deficiencies.

SWP for Senior Citizens: A Retirement-Friendly Option

SWP among the elderly has become increasingly popular everywhere in the world because of its pension-like character. Conventional instruments of retirement such as pensions or annuities might promise fixed rates of return, but SWPs are manageable and in your hand.

Channels Are:

• Fixed income to the extent of lifestyle requirements.
• Option flexibility to decide the amount of withdrawal and timing.
• Higher chance of after-tax returns than fixed deposits.
• Flexibility of leaving a legacy by giving away part of the corpus.
• One can invest in SWP as well as other retirement products such as PPF, SCSS, or annuity to have a diversified retirement income plan.

Points to Remember While Applying SWP

While SWPs have numerous advantages, there are a few things to remember:

• Market Risk: The market will decide the value of redemption of units owned. Fall in the market will erode capital at a higher rate.
• Taxation: Withdrawal can lead to capital gains tax based on the duration of holding and the type of fund.
• Exit Load: Certain mutual funds impose an exit load when you redeem units within a specified time period.
• Don't Overdraw: Over-withdrawing too early might deplete your corpus.

Making your SWP with a reasonable approximation of your monthly need and investment tenure is necessary.

Conclusion

A Systematic Withdrawal Plan, or SWP, is an excellent facility for converting your investments in mutual funds into regular income. In the event of a transient insufficiency of income or retirement, SWP can help you cover your expenses without disposing of your investments all at once.

It introduces discipline, flexibility, and peace of mind, while leaving the rest of your money invested and growing even further. SWP is not just a wise investment choice; it's a path to financial security during uncertainty in life.

But, as with any investment option, initiating an SWP must be as per your objectives and checked from time to time. Your financial advisor or certified financial planner may also assist in framing your SWP plan more efficiently.

For those looking to go a step further in planning their finances, platforms like Indiabulls Securities Limited can help. With their market insights, stock market investment , and user-friendly platforms, helping you choose and understand smart investment tips.

FAQs

1. What is SWP in mutual funds?

SWP stands for Systematic Withdrawal Plan. It is an option under which investors can withdraw funds at regular intervals like quarterly or monthly from their investment in a mutual fund.

2. Is SWP superior to SIP in terms of generating income?

Yes, in terms of generating income, SWP is superior as it provides periodic withdrawal. SIP is intended for the creation of investment.

3. Can I stop or modify my SWP anytime?

Yes, SWP is free of cost. You can stop it, modify the withdrawal amount, or modify the frequency by providing a notice to your fund house.

4. Is the received amount under SWP taxable?

Yes, the received amount is taxed as capital gains based on holding period and mutual fund category. Long-term equity gains over ₹1 lakh attract a tax of 10%.

5. Where can SWP with mutual funds be applied?

One can use SWP in debt funds, hybrid funds, or conservative balanced funds, which are usually best suited for SWPs as they are stable and less volatile compared to pure equity funds.

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