Different mutual fund schemes offer systematic withdrawal plans (SWPs) to their investors. This kind of investment option gives the investor the flexibility to make regular withdrawals from a mutual fund at predetermined intervals while still gaining some benefits. SWP is an excellent way to utilize long-term investments for short-term needs. But what is the SWP meaning in mutual funds, and how does it work?
What is SWP?
Investing in a Systematic Withdrawal Plan (SWP) can provide ultimate convenience. You get to choose how much and when funds are withdrawn from your mutual fund scheme, all while keeping your original capital intact if desired. This is achieved by selling off designated units at a predetermined date, with proceeds automatically sent directly to your account! Many investors consider SWP as an effortless way of divesting their investment profits while earning a regular income from their investments.
What are the Features of SWP in Mutual Funds?
Systematic Withdrawal Plans in mutual funds come with several features. These include:
- Flexibility to choose the withdrawal frequency, amount and date of withdrawal.
- The ability to set up systematic withdrawals from any or all of your holdings.
- Automatic reinvestment option for those who don’t want to liquidate their investments but rather withdraw a portion at regular intervals.
- An SWP calculator can help you determine how much you can withdraw without significantly impacting your capital gains on long-term investments.
- Allows investors to earn capital gains without having to liquidate their investments.
What are the Benefits of a Systematic Withdrawal Plan?
1. Investment Discipline:
SWP allows investors to maintain their investments while also allowing systematic withdrawals, which can help in creating an investment discipline. You cannot withdraw larger amounts in the event of market fluctuations. This keeps your investment intact and prevents you from making hasty decisions.
SWP plans are cost-effective since there are no fees or charges associated with them. The only cost involved is the expense ratio of the mutual fund in question which is already applicable to all investors regardless of whether they decide to opt for systematic withdrawals or not.
3. Ideal in a Bull Run:
SWP is an ideal investment option in a bull run, where the stock markets are on an uptrend. Systematic withdrawals ensure that investors can take advantage of such times without having to worry about liquidating their investments or reinvesting at lower prices.
4. Rupee Cost Averaging:
SWP provides a systematic way of investing in mutual funds, which is referred to as Rupee Cost Averaging. Here, smaller amounts are invested periodically at different NAVs (net asset value), thus making the average cost lower and increasing returns over time.
5. Regular Income:
SWP can be used to generate regular income from investments by choosing an appropriate withdrawal frequency and amount. This ensures that there is a continuous stream of funds for those who need steady cash flow for their daily expenses.
6. Tax Benefits:
SWP plans provide tax benefits to investors depending upon the tenure of their investment. Short-term capital gains (for investments held for less than one year) are taxed at 15%, whereas long-term capital gains (for investments held for more than one year) are taxed at 10%. SWP is not subject to tax deducted at source; however, capital gains tax applies depending on the type of scheme and amount withdrawn.
How to Effectively Use an SWP Plan?
If you are seeking the most out of your systematic withdrawals, it is important to understand how to use SWP in mutual funds effectively. Here are some tips that can help:
- Choose a Suitable Frequency: Choose a withdrawal frequency that best suits your needs – monthly, quarterly or annually. It is also important to decide if the amount withdrawn should be fixed or variable.
- Plan for Long-term Gains: If you are investing for long-term goals such as retirement, systematic withdrawals should not be high enough to significantly impact your capital gains at maturity. This will ensure that your capital remains intact and grows over time.
- Pick a Fund Wisely: The fund’s performance will have a direct impact on your systematic withdrawals. It is important to select the right fund based on your financial goals and risk appetite. The fund should have a track record of consistent returns and be managed by an experienced team.
- Regularly Monitor: SWP plans should be monitored regularly to ensure that all investments are performing according to expectations. You can review the performance of each fund in the portfolio and make changes if needed.
Systematic Withdrawal Plans (SWP) are a great way to generate income from investments without having to liquidate them. Many investors use it to create their pension income or to supplement their monthly earnings.