Let us understand about Systematic Withdrawal Plans (SWPs) in Mutual Funds

Many of you must be aware that Mutual Fund schemes have a feature known as Systematic Withdrawal Plan (SWP). Investors can avail of SWP to redeem a pre-defined amount from their investment in an MF Scheme on a regular basis. It is a convenient way to withdraw from the investment in a systematic manner. It is a great facility as -

- People can use it as a form of a regular income flow.

- Retired persons who do not have a regular income can use SWP to take care of their expenses.

SWP can be initiated in liquid funds, debt funds or equity funds. It is a better form of income as compared to dividends as dividends are not regular always. Moreover dividend distributed is taxed in the hands of the Mutual fund house leading to lesser funds remaining to be distributed.

There are two ways in which you can withdraw using this feature –

Fixed Amount Withdrawal – A fixed amount can be withdrawn on a regular basis – monthly quarterly or half yearly or annually. For example, you can set up an SWP of Rs. 15000 on a monthly basis which means Rs. 15000 will be credited to your account every month. The advantage is that you know what your cash flow will be. The disadvantage is that if the value has gone down, you will need more units to be redeemed to generate the fixed amount

Appreciation Withdrawal – You can set up an SWP equivalent to the amount that has been appreciated on a monthly or quarterly basis. The advantage here is that the capital stays intact and only the gains are withdrawn. But, suppose there is very less appreciation or the value has gone down, there will be no cash flow.

The tax applicable will be the same as that applicable for redemption of units. It is important to note that exit load if any will be applicable to SWP as well.

When should I make use of SWPs?

• It is a good investment strategy to use for generation of regular income in scenarios such as loss of job, kicking off an enterprise or in the post retirement age.
• It is a good strategy to protect from risks. You can withdraw when your redemption target is reached.
• Gains from Mutual Funds are being taxed. If you redeem using SWP in early phases of investment, in growth based equity funds, the proportion of gains redeemed will be less as compared to the capital redeemed. This means tax outgo will also be less.

When is it not a good idea to use SWPs?

• When the market is falling or volatile, it is better to avoid SWPs.
• If you have a regular cash flow, let your investments appreciate. Do not withdraw from it unnecessarily.

SWP and STP are different. STP stands for Systematic Transfer Plan where you can set up an amount to be transferred from an MF scheme in one category to another.