A Systematic Withdrawal Plan (SWP) in mutual funds is a facility that allows investors to withdraw a fixed amount of money from their mutual fund investment at regular intervals. It offers a balanced approach to income generation and capital appreciation, making it a versatile financial tool for various investor needs.
Content:
- SWP Meaning In Mutual Fund
- Benefits Of Swp In Mutual Fund
- How To Invest In SWP Mutual Fund?
- Systematic Withdrawal Plan Taxation
- Best Swp In Mutual Fund
- What Is Swp In Mutual Fund – Quick Summary
- Systematic Withdrawal Plan Meaning – FAQ
SWP Meaning In Mutual Fund
A Systematic Withdrawal Plan (SWP) is a financial tool that enables investors to withdraw a predetermined amount from their mutual fund investments at regular intervals, such as monthly, quarterly, or annually. This offers a structured way to receive a steady income stream from one’s investments.
Understand this with a simple example: Consider Mrs. Gupta, a 60-year-old retiree in Delhi. She has ₹50 lakhs invested in a mutual fund and opts for an SWP of ₹30,000 per month. This way, she can maintain her lifestyle without depleting her principal amount quickly. Over a year, she would withdraw ₹3.6 lakhs, leaving the remaining amount to continue growing.
Benefits Of SWP in Mutual Fund
The primary advantage of a SWP is that it provides a consistent and predictable income stream, which can be particularly beneficial for retirees or those with regular financial obligations.
Regular Income:
SWPs are ideal for individuals like retirees who require a steady income to meet their daily expenses. The predetermined withdrawal amount ensures that they have a reliable source of funds.
Capital Growth:
While you’re withdrawing a portion of your investment, the remaining amount continues to be invested, offering the potential for capital appreciation. This is especially beneficial for long-term financial planning.
Tax Efficiency:
SWPs can be more tax-efficient compared to lump sum withdrawals. The tax is only applicable on the gains made on the withdrawn amount, not on the entire investment.
Flexibility:
SWPs offer the flexibility to choose the withdrawal frequency and amount, allowing investors to tailor the plan according to their financial needs.
Liquidity:
Since you can withdraw funds at regular intervals, SWPs provide better liquidity compared to other investment options that may have lock-in periods or penalties for early withdrawal.
How To Invest In SWP Mutual Fund?
Investing in an SWP Mutual Fund is a straightforward process that involves selecting a suitable mutual fund and specifying your SWP details. It’s an excellent way to manage your investments while ensuring a steady income. Here is the process for investing in SWP mutual funds:
- Choose a Mutual Fund: Select a mutual fund that aligns with your investment goals and risk tolerance.
- Specify SWP Details: Decide on the withdrawal amount and frequency. This could be monthly, quarterly, or annually, based on your income needs.
- Submit Required Documents: Complete the application form and submit any required identification and financial documents.
- Review and Confirm: Double-check all the details before confirming your SWP setup.
- Monitor and Adjust: It’s advisable to periodically review your SWP and make adjustments as needed, especially if your financial situation changes.
Systematic Withdrawal Plan Taxation
Taxation on Systematic Withdrawal Plans (SWP) in mutual funds applies only to the capital gains portion of each withdrawal, not the total amount, offering a tax-efficient income generation method by keeping the principal amount untouched.
Let’s consider Mr. Kumar, a 45-year-old investor residing in Bengaluru. He has invested ₹10 lakhs in an equity mutual fund and has decided to set up an SWP to withdraw ₹20,000 every month. Assuming that the capital gain per withdrawal is ₹2,000, Mr. Kumar will only be liable to pay tax on this ₹2,000 capital gain, not on the entire ₹20,000 withdrawal.
Best SWP In Mutual Fund
Here are the best three SWP investment options:
| Fund Name | 1-Year Return (%) | 3-Year Return (%) | 5-Year Return (%) | Expense Ratio (%) |
| HDFC Hybrid Equity Fund | 16.36 | 22.7 | 14 | 1.8 |
| ICICI Prudential Balanced Advantage Direct Growth | 12.99 | 15.59 | 12.07 | 0.9 |
| Aditya Birla Sun Life Balanced Advantage Fund | 14 | 15.76 | 11.77 | 0.66 |
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What Is Swp In Mutual Fund – Quick Summary
- A Systematic Withdrawal Plan (SWP) in mutual funds allows investors to withdraw a fixed sum at regular intervals, offering a reliable income stream. It’s particularly useful for retirees and those needing consistent income.
- SWP provides a structured way to generate income from your investments. For example, Mrs. Gupta, a retiree, uses SWP to withdraw ₹30,000 monthly from her ₹50 lakh mutual fund investment, maintaining her lifestyle while allowing the principal to grow.
- The primary benefits of SWP include regular income, capital growth, tax efficiency, flexibility, and liquidity. Each point offers distinct advantages, making SWP a versatile investment tool.
- Investing in an SWP is straightforward. You select a mutual fund, specify withdrawal details, submit required documents, and periodically review your plan.
- SWP offers tax advantages as you’re only taxed on the capital gains of each withdrawal. For instance, Mr. Kumar, who withdraws ₹20,000 monthly, is taxed only on the ₹2,000 capital gain per withdrawal.
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Systematic Withdrawal Plan Meaning – FAQ
SWP, or Systematic Withdrawal Plan, is a feature in mutual funds that allows investors to withdraw a predetermined amount at regular intervals, such as monthly or quarterly. It’s an excellent tool for those requiring a steady income, like retirees.
SWP is a good option for those who want to balance income generation with capital growth. It’s particularly beneficial for retirees or individuals who need a consistent income stream while keeping the principal amount invested.
In SWP, you specify the amount and frequency of withdrawals. The mutual fund then sells the equivalent units from your investment to provide the cash. The remaining units continue to earn returns, allowing for potential capital appreciation.
While SIP (Systematic Investment Plan) is about investing at regular intervals, SWP is about withdrawing. SIP is generally better for wealth accumulation, whereas SWP is better for income generation. Your choice depends on your financial goals.
SWP is not entirely tax-free. Taxes are applicable only on the capital gains portion of the withdrawn amount, making it a tax-efficient option compared to lump-sum withdrawals.
The minimum amount for SWP varies from fund to fund but is generally around ₹500 to ₹1,000. Always check the specific mutual fund’s terms for exact details.
SWP is usually open to any investor with money in a mutual fund. But before starting an SWP, some funds may have rules, like a minimum amount of time you have to invest.
SWP is an excellent option for retirement as it provides a consistent income stream while allowing the remaining investment to grow, offering a balanced financial strategy for retirees.
There are generally two types of SWP: Fixed SWP, where you withdraw a fixed amount, and Variable SWP, where the withdrawal amount varies based on a percentage of the total investment.
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