What Does Systematic Withdrawal Plan Mean In Mutual Funds?

Systematic Withdrawal Plan or SWP is a great way of earning monthly income and can be very useful for retirees who mostly look upon bank fixed deposits to earn a regular income. As the name suggests, a SWP allows the investor to withdraw a fixed amount from his invested capital systematically i.e at prespecified intervals. This amount that is withdrawn from your investments in a mutual fund acts like your monthly income and helps you manage your regular expenses.

However, SWP is not a popular option amongst most investors who are looking for a regular monthly income. The reason for this lack of popularity is two -fold. One, the mutual fund industry hasn’t yet popularized the concept of SWP amongst investors the way it has done for SIP. The second reason is that investors feel it is a complicated process as they don’t understand its mechanics as compared to a bank FD which sounds very straight forward.

Let’s simplify SWP for you so that next time you are looking for a regular monthly income plan or someone in your social circle needs such an option you don’t shy away from SWP. A SWP is usually done by investing a corpus in a fund and then withdrawing a fixed amount or the appreciated amount every month/quarter from this investment. While the corpus keeps earning some return over the invested period, you get the benefit of this appreciation by withdrawing them at regular intervals.

The withdrawals under SWP are more tax efficient than investments in bank FDs or post office saving schemes because in case of SWP, you get taxed only on the capital gain portion of the withdrawal. For instance, if you invested Rs.9 lakhs in a mutual fund through SWP at NAV of Rs.90 to withdraw Rs. 10,000 every month, you initially start with 10,000 units of the fund. On the day of the withdrawal, the NAV is say Rs.100. Now to withdraw Rs.10,000, you end up withdrawing 100 units. The gain on this 100 units is only Rs.1000 (Rs.10 gain in NAV X 100 units withdrawn). Thus, your tax liability is much smaller in case of a SWP.

If you had invested the same 9lakhs in a bank FD at 10% interest, then you would have to pay tax on the entire Rs. 90,000 of interest income at the highest tax rate applicable to you. If you fall in the 30% income tax slab, you would end up paying Rs. 27,000 as tax over a period of one year.

As you can see, SWP in mutual funds provides tax efficient returns when compared to bank FDs. Income from FDs/pension plans are taxed at higher effective rates compared to withdrawals under SWP. You can easily stop a SWP or change the withdrawal amount anytime depending on your need unlike in a pension plan.

To decide the ideal amount for a SWP plan in a mutual fund, you can use any of the systematic withdrawal calculators available on various mutual fund sites. A SWP mutual fund calculator helps you decide the ideal amount to withdraw for a given lumpsum amount invested in a fund with a given expected return over a certain no. of years. Such calculators can help you avoid overdrawing your investments because you shouldn’t withdraw more than what you are earning on your investments else you may exhaust your corpus before time. You can explore more about SWPs on a very investor friendly, purely educative content-based site managed by the mutual fund industry body in India, AMFI. 

Check out its investor education site www.mutualfundssahihai.com and you’ll be at ease when it comes to anything about mutual fund investments. Try it to believe it!