Systematic Withdrawal Plan (SWP) – Meaning, Benefits & Top SWP Funds to Invest
You’ve probably heard of Systematic Investment Plans (SIPs) – the hassle-free way to grow your wealth by consistently investing a fixed amount over time. SIPs have been the go-to strategy for building financial security and achieving long-term financial goals. But what happens when you’ve accumulated a sizable amount and would like to withdraw systematically? That’s where Systematic Withdrawal Plans (SWP) comes into picture.
Thus, in this blog, we will delve into what SWP in mutual funds means, the best mutual funds for SWP, how to invest, benefits, taxation, and more.
What is SWP in Mutual Fund?
A Systematic Withdrawal Plan (SWP) is an extended facility in mutual funds that enables you to withdraw money from your investments in a systematic manner, especially during retirement. With an SWP, you can choose your withdrawal amount, frequency, and duration according to your needs. The best SWP plans in India provide liquidity to investors, allowing them to access their funds when needed, making it a suitable option for those who require regular cash flows.
Here are some important features of a systematic withdrawal plan:
- SWP provides investors with a scope of regular income.
- With SWP, you can easily withdraw a fixed amount from your investment at scheduled intervals.
- One can also choose the withdrawal amount, frequency, and duration of the SWP according to their financial needs and requirements.
- It can instil a disciplined approach to withdrawing funds, ensuring investors do not deplete their investments too quickly.
How Does a Systematic Withdrawal Plan Work?
Let’s understand how a systematic withdrawal plan works with an example.
Assume you have invested Rs. 1,00,000 in a mutual fund and want to withdraw a specific amount every month. Therefore, you decide to set up an SWP to withdraw Rs. 5,000 on a specific date every month. The mutual fund’s Net Asset Value (NAV) is Rs. 20 per units.
Now, let’s have a look at the SWP mutual funds return calculation process.
Calculate the Number of Units to Redeem
To withdraw Rs. 5,000, the AMC calculates how many mutual fund units need to be redeemed each month. Let’s apply the following formula to find that out:
Number of Units to Redeem = Withdrawal Amount / NAV
- Number of Units to Redeem = Rs. 5,000 / Rs. 20 = 250 units
Redemption Process
At the beginning of each month, the mutual fund will redeem 250 units from the investor’s holdings and credit Rs. 5,000 to the investor’s bank account.
Adjusted NAV
After the redemption, the NAV of the mutual fund may change. Let’s say the NAV after the first redemption is Rs. 22.
Calculate the New Number of Units
For the next month’s withdrawal, the investor needs to calculate how many units to redeem at the updated NAV.
- Number of Units to Redeem = Withdrawal Amount / NAV
- Number of Units to Redeem = Rs. 5,000 / Rs. 22 = 227.27 units (rounded to the nearest whole unit)
Redemption Process (Next Month)
At the beginning of the second month, the mutual fund will redeem 227 units (rounded) from the investor’s holdings at the new NAV and credit Rs. 5,000 to the investor’s bank account.
This process continues every month as long as the investor wants to receive regular withdrawals.
| Steps | Details |
|---|---|
| Initial Investment | Rs. 1,00,000 |
| Monthly Withdrawal Amount | Rs. 5,000 |
| Mutual Fund’s NAV | Rs. 20 per unit |
| Number of Units to Redeem (Month 1) | Withdrawal Amount / NAV = Rs. 5,000 / Rs. 20 = 250 units |
| Redemption Process (Month 1) | At the start of the month, the mutual fund will redeem 250 units and credit Rs. 5,000 to the investor’s bank account. |
| Adjusted NAV (After Month 1) | Rs. 22 per unit (example) |
| New Number of Units (Month 2) | Withdrawal Amount / NAV = Rs. 5,000 / Rs. 22 ≈ 227.27 units (rounded to nearest whole unit) |
| Redemption Process (Month 2) | At the start of the second month, the mutual fund will redeem approximately 227 units (rounded) at the updated NAV and credit Rs. 5,000 to the bank account. |
How to Start SWP in Mutual Funds Online?
Here are a few steps that can help you to set-up a mutual fund SWP.
- When investing in mutual funds, one can explore different categories like equity, debt, hybrid. Investors can also look out for specific options that aligns well with your investment goals, risk tolerance, and timeline.
- To initiate a SWP, investors need to submit a SWP form, also known as a distribution form, to their account provider. This form allows them to choose a distribution schedule, such as monthly, quarterly, or annually, to suit their financial needs.
- Once a SWP is set up, investors can enjoy a steady stream of regular withdrawals tailored to their specific needs. The predetermined amount will be automatically transferred to their designated bank account on the scheduled dates, providing a hassle-free and predictable income stream.
Best SWP in Mutual Funds in India 2024 (Based on 3Y CAGR)
| Fund Name | AUM (in cr) | CAGR 3Y (in %) | Expense Ratio (in %) |
|---|---|---|---|
| ICICI Pru Equity & Debt Fund | ₹34,733.08 | 25.01 | 1.02 |
| Quant Absolute Fund | ₹2,114.18 | 22.34 | 0.75 |
| Franklin India Equity Hybrid Fund | ₹1,806.96 | 16.76 | 1.08 |
| Canara Rob Equity Hybrid Fund | ₹10,152.64 | 15.67 | 0.58 |
| SBI Equity Hybrid Fund | ₹68,409.821 | 14.42 | 0.74 |
Disclaimer: Please note that the above list is for educational purposes only, and is not recommendatory. Please do your own research or consult your financial advisor before investing.
Note: The list of top mutual funds for SWP is from 18th June 2024 and the data is derived from Tickertape Mutual Fund Screener.
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Overview of the Top 5 SWP Mutual Funds
ICICI Pru Equity & Debt Fund
ICICI Prudential Equity & Debt Fund Direct-Growth is an Aggressive Hybrid mutual fund scheme from ICICI Prudential Mutual Fund. The fund has been active since 3rd November 1999. The scheme’s equity exposure is between 65-80% and debt exposure is maintained between 20-35%. As of 18th June 2024, the AUM of the fund is Rs. 34,733.08 and has an expense ratio of 1.02%.
Quant Absolute Fund
Quant Absolute Fund Direct-Growth is an Aggressive Hybrid mutual fund scheme from Quant Mutual Fund. The scheme was introduced to investors on 15th April 1996. As of 18th June 2024, the AUM of this fund is Rs. 2,114.18 cr. The fund has an expense ratio of 0.75%, close to what other aggressive MFs charge. Additionally, it has generated better returns compared to other funds in the same category.
Franklin India Equity Hybrid Fund
Franklin India Equity Hybrid Fund is an Aggressive Hybrid mutual fund scheme from Franklin Templeton Mutual Fund. The scheme has been active since 10th December 1999. The AUM of this fund as of 18th June 2024 is Rs. 1,806.96 cr. and the expense ratio is 1.08%. In terms of composition, the fund invests in both equities (65-80% of its assets) and fixed-income instruments (20-35% of its assets).
Canara Rob Equity Hybrid Fund
Canara Rob Equity Hybrid Fund is an open-ended hybrid scheme investing predominantly in equity and equity-related instruments. It was launched by Canara Robeco Mutual Fund on 20th July 2007. The fund’s benchmark is CRISIL Hybrid 35+65 – Aggressive Index. As of 18th June 2024, the AUM of this fund is Rs. 10,152.64 cr. and has an expense ratio of 0.58%. Fund has been able to generate better returns than FDs.
SBI Equity Hybrid Fund
SBI Equity Hybrid Fund Direct Plan-Growth is an Aggressive Hybrid mutual fund scheme from SBI Mutual Fund. The fund has existed since 31st December 1995. The AUM of the fund is Rs. 68,409.82 cr., and the expense ratio is 0.74% as of 18th June 2024. Currently, the fund has a 73.31% allocation in domestic equities and 21.71% in debt, out of which 12.27% is allocated to government securities and 9.26% is in low risk securities.
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Who Can Benefit from the Top SWP Funds?
SWPs can be suitable for investors who are seeking a regular income stream from their investments. While Income Distribution Cum Capital Withdrawal (IDCW) plans of mutual funds can also provide periodic payouts, they are not as reliable as SWPs since the dividend declarations are at the discretion of the fund house.
SWPs can also be useful for investors who want to maintain a disciplined approach to withdrawing money from their savings. By setting a fixed withdrawal amount, they can ensure they don’t overspend or withdraw too much, providing financial stability and control.
Benefits of a Systematic Withdrawal Plan
Let’s have a look at the benefits of the best systematic withdrawal plan below.
Tax Benefits
- Capital Gains Tax: When you set up an SWP, you have control over the timing and amount of your withdrawals. You can spread your withdrawals over multiple financial years to stay within the lower tax brackets, potentially reducing the tax impact.
- Dividend Distribution Tax (DDT): Some mutual fund schemes, such as equity-oriented funds, may not have a Dividend Distribution Tax when you opt for a systematic withdrawal plan compared to receiving regular dividends. This can result in tax savings for investors.
We’ll explore more about taxation on SWP later in the article.
Rupee Cost Averaging
- Reduced Market Timing Risk: A systematic withdrawal plan reduces the need for trying to time the market. Instead of attempting to sell at the right market peak, an SWP allows you to stick to a disciplined withdrawal strategy, potentially mitigating the risk associated with market volatility.
- Risk Mitigation: Withdrawing a fixed amount on a regular basis may help reduce the risk of selling a large portion of your investments when the market is down. This could prevent your portfolio from losing significant value during market declines. However, it’s important to approach this strategy with caution.
Effective Ways of Using SWP
Below are some effective strategies for utilising a SWP:
- Establishing a Steady Secondary Income Stream: In today’s economic market, having an additional income source is essential to cope with the cost of living. Investing in mutual funds and utilising SWP may enable the creation of a consistent secondary income.
- Building Your Own Retirement Fund: Regardless of whether you have an existing pension plan, you can construct a corpus approximately five years before retirement and allocate it into a mutual fund scheme based on your risk appetite. Upon retirement, initiating an SWP may allow you to generate your own pension fund.
- Capital Preservation: Rather than redeeming your entire mutual fund investment at once, a SWP allows you to withdraw your investment in a structured manner. This approach ensures that a significant portion of your portfolio remains invested over the long term, enabling it to grow.
Does SWP in Mutual Funds Work Best for Retirees?
SWP in mutual funds may offer retirees an ideal solution for their financial needs during retirement. As retirees seek a reliable income source, they can utilise their retirement savings or gratuity and select the right mutual fund schemes to set up an SWP plan. It’s akin to creating a customised pension plan that aligns with your specific financial requirements. Moreover, just as a SIP spreads the cost of purchase, the SWP mutual fund scheme evens out the cost of withdrawals. This makes SWP an invaluable tool for retirees seeking financial stability during their golden years.
Difference Between SIP and SWP
Let’s look at the difference between SIP and SWP.
| Basis | Systematic Investment Plan (SIP) | Systematic Withdrawal Plan (SWP) |
|---|---|---|
| Definition | A SIP is a method of investing a fixed amount in a mutual fund scheme at regular intervals. | A SWP is a method of withdrawing a fixed amount from a mutual fund scheme at regular intervals. |
| Purpose | To build a disciplined investing approach over the long-term. | Provides the investor with a scope of a regular income stream. |
| Investment | You invest a fixed amount at regular intervals (monthly, quarterly, etc.). | You withdraw a fixed amount at regular intervals (monthly, quarterly, etc.). |
| Tax | Tax on SIP is applicable when your mutual fund units are redeemed. | The tax is calculated only on the capital gains component of each SWP instalment. Similar to SIP, the tax depends on the fund type and its holding period. |
| Suitability | Suitable for long-term wealth creation, especially for investors with a disciplined approach. | Ideal for retirees and senior citizens primarily. |
Taxation on SWP
SWP can be impacted by taxation. One must understand the impact of tax on the selected mutual fund before making an investment decision.
In case of withdrawal from the equity funds, a short-term capital gains tax of 15% will be applied if the funds are withdrawn within one year. Additionally, an exit load, determined by the fund house, will be charged on redemptions made within this period. On the other hand, after one year, a long-term capital gains tax of 10% is applied on gains exceeding Rs. 1 lakh without the benefit of indexation.
If the withdrawal is from a debt fund, it’s obvious that the taxation policy will be different from equity funds. In a debt fund, if redeemed within 3 years, short-term capital gains are taxed at the investor’s applicable slab rate. For redemptions after 3 years, long-term capital gains are taxed at 20% with the benefit of indexation (assuming the investor is a resident of India). These tax rates are subject to an additional surcharge and the applicable health and education cess.
Investors can choose any mutual fund scheme that matches their risk tolerance and opt for a Systematic Withdrawal Plan (SWP). Just as an SIP promotes disciplined investing, a SWP creates a disciplined withdrawal approach, enhancing the investor’s overall investment journey.
Here is a short summary of the taxation on different types of funds:
| Type | Short-Term Capital Gains Tax | Long-Term Capital Gains Tax |
| Equity Mutual Funds | 15% | 10% without any indexation |
| Balanced Mutual Funds | 15% | 10% without any indexation |
| Debt Mutual Funds | Depends on the tax slab | 20% without any indexation |
Factors to Consider Before Investing in SWP in Mutual Funds in India
Before you choose the best systematic withdrawal plan and jump into investing, it’s crucial to consider the following key factors.
- Financial Goals: The first step is to clearly define your financial goals and the purpose of the SWP. Determine whether you need the SWP for regular income, such as retirement, or for a specific financial goal. This may help you select the right mutual fund scheme that aligns with your objectives.
- Market Condition: It’s crucial to consider market conditions before investing in the best mutual fund for a systematic withdrawal plan. Since SWP investments are sensitive to market fluctuations, current and expected future market conditions impact returns. Therefore, it’s essential to research market conditions and macroeconomic factors, as these influence stock markets in India and globally.
- Exit Load and Expenses: When selecting a mutual fund for an SWP, it’s important to look for funds with a minimal exit load and a low expense ratio. This can help maximise the returns you receive from your systematic withdrawals and ensure your investment objectives are met efficiently.
- Tax Implications: The tax implications of your SWP, such as capital gains tax and dividend distribution tax, can impact your overall returns. Opting for tax-efficient funds can help maximise your SWP return.
To Wrap It Up…
To conclude, a Systematic Withdrawal Plan is a financial tool that offers many benefits. From providing a regular income stream to enabling disciplined withdrawals while keeping investments intact, SWP has got you covered. However, it’s essential to tailor your SWP investment strategy to your specific goals and consult a financial expert before investing in this plan.
Frequently Asked Questions About SWP
The SWP full form in mutual funds is Systematic Withdrawal Plan. A systematic withdrawal plan is an investment strategy in which you can withdraw a fixed amount of money from your mutual fund holdings at a predetermined interval.
Fixed Deposits (FDs) may provide stability and fixed returns, while SWP potentially offers flexibility, allowing adjustments to withdrawals as needed. Therefore, it is crucial to evaluate your specific needs to determine which option is better for your investment strategy.
Investors who need a regular income stream from their mutual fund investments, such as retirees, pre-retirees, and those with other financial obligations, can consider investing in the best mutual fund for SWP. Additionally, investors with high tax brackets and those seeking capital protection can find SWP a suitable option.
In an SWP plan, investors have the flexibility to choose the amount, frequency, and withdrawal date. Therefore, investors can stop the SWP at any time or add further investments.
A Systematic Withdrawal Plan (SWP) is the opposite of a Systematic Investment Plan (SIP). With a SIP, you invest money at regular intervals, while with a SWP, you withdraw a fixed amount at regular intervals. Both serve different purposes and largely depend on what you want to do.
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