Systematic Withdrawal Plan: Understanding the need

A systematic withdrawal plan (SWP) is a systematic investment withdrawal plan typically in use for retirement.  SWPs can be structured in various ways by investors. Mutual funds allow an investor for determining a systematic withdrawal plan that includes:

• interval payouts monthly;
• quarterly;
• semi-annually;
• or annually.

Systematic Withdrawal Plan (SWP) allows an investor to withdraw from his mutual fund scheme every month on an already set date. This withdrawal can be of fixed or variable amount.

What do you understand by the Systematic Withdrawal Plan

Systematic Withdrawal Plan helps in redeeming your investment from a mutual fund scheme in a systematic manner. Unlike lump sum capital withdrawals, SWP allows you to withdraw money in installments. It can be taken as the opposite of investing in SIP. In SIP, you channelize your savings from the bank account into the preferred mutual fund scheme. Whereas in SWP, you are channelizing your investments from the scheme to your savings bank account. It’s one of the strategies for dealing with market fluctuations.

With the Systematic Withdrawal Plan, you are able to customize the cash flow as per your requirements. You have a choice either choose to withdraw just the capital gains on your investment or a fixed amount. This way you not only have your money still being invested in the scheme, but you will also be able to have access to regular income and returns. The money you are withdrawing can be used for reinvesting in some other fund or can be retained by you in the form of cash.

Also read: Best SIP to Invest in Mutual Funds

The need for a Systematic Withdrawal Plan

You may know that your mutual fund investments always face the market fluctuations. It means that these fluctuations may impact the fund NAV adversely. Especially, when an individual is approaching a goal, the fund returns may get emptied if not withdrawn on time. So, with the help of an SWP, you can keep a check on your withdrawals as per the financial needs. If your goal requires to be funded in phases, then you should opt for an SWP. This will ensure the availability of the funds at the right time. In this way, goal accomplishment may not get delayed owing to a cash crunch.

SWP also helps investors who want a second income in addition to their salary from the job. With this plan, you as an investor can create a flow of income from your investment that is regular. If you seek to have periodic incomes for your travel or other needs, this is a great way to set this provision. It should be created in such a way that when you need cash the most, it is available.

Is the SWP a good investment option

There are two main reasons why this is a wise investment strategy. Firstly, these withdrawals which are also referred to as redemptions, are not subject to tax deductions at source. The capital gains though are taxed on the withdrawn amount. You may also opt for setting up your withdrawal in such a manner that you only draw the appreciation that is made on the investment amount. This keeps your capital invested while at the same time you enjoy the gains at a regular interval.

The withdrawal options

With the fixed withdrawal option, you can access a specified amount from your investment on either a monthly or a quarterly basis. With the appreciation withdrawal option, you may withdraw only the appreciated amount on a monthly or a quarterly duration.

How does a Systematic Withdrawal Plan work?

When you choose a Systematic Withdrawal Plan, it affects your mutual fund account as well. It is important to note that an SWP is not the same as opening a fixed deposit account in a bank where you receive monthly interests. With a fixed deposit, the corpus value is not impacted when you withdraw the interest but in the case of a systematic withdrawal plan in mutual fund schemes, the value of your fund is reduced by the number of units you withdraw.

Tax Implications of SWP

The redemption via a systematic withdrawal plan is subject to taxation.

In case of debt funds, if your holding period is less than 36 months, then the amount that you withdraw will form a part of your income. It will then be taxed according to your income slab. On the other hand, if the holding period is more than 36 months, then the long-term capital gains will be taxed at 20% with indexation.

In case of equity funds, if your holding period is less than 1 year, then the withdrawn amount will be taxed at the rate of 15%. On the other hand, if the holding period is more than 1 year, then the long-term capital gains will be taxed at 10% without indexation. An open-ended fund gives you the option of redeeming the investment or modifying it at any time.

FAQs

Q1-Is SWP good for Retirees?

A Systematic Withdrawal Plan (SWP) gives surety of a stable payout to the investors at predetermined intervals. This implies that at some stage the investments will be completely repaid along with the gains in the hand of a mutual fund investor. Thus its a good investment for retirees.

Q2-What is the difference between SWP and SIP?

SIP is a systematic way of investing your money in mutual funds. You can invest every month or quarter or year, it depends on the plan you have chosen. It encourages investors to save money and in the end, they can redeem better returns.

Systematic Withdrawal Plans (SWP), allows you to withdraw any amount of money from a mutual fund whenever you want. Funds are generally withdrawn either to rebalance the existing portfolio by investing in other funds or for meeting personal expenses. SWP is somewhat the reverse of SIP.

Q3-What is the Systematic Withdrawal Plan calculator?

SWP lets you get a fixed amount at a pre-determined time-frequency, like monthly, quarterly, half-yearly or annually.
Using a calculator to plan for your post-retirement and other regular monthly income needs helps you in determining the amount you will get.

Q4-What is Cutoff time for Mutual Funds?

The cut-off time determines what Net Asset Value (NAV) you get to buy or sell units of your mutual fund scheme. Simply put, the allotment of NAV depends on the time you submit your application and money with the fund house. This time is called cut-off time in the mutual fund world. There are different cut-off timings for liquid funds, debt and equity funds. You can be allotted the NAV of the same day, the previous day or the next day according to the time you submit your application and funds.

Q5-How is NAV calculated?

To get the total net assets of a fund, subtract any liabilities from the current value of the mutual fund’s assets and then divide the figure by the total number of units outstanding. The resulting figure is the NAV of the mutual fund. The NAV of a mutual fund is always calculated at the end of the market day.

Conclusion

A systematic withdrawal plan (SWP) is a systematic investment withdrawal plan typically in use for retirement. On the other hand, unlike lump sum capital withdrawals, SWP allows you to withdraw money in installments. SWP is the opposite of SIP. In SIP, you are channelizing your savings fro your bank account into the preferred mutual fund scheme. Whereas in SWP, you are channelizing your investments from the scheme to your savings bank account.

SWP lets you get a fixed amount at a pre-determined time-frequency, like monthly, quarterly, half-yearly or annually. With a fixed deposit, the corpus value is not impacted when you withdraw the interest but in the case of a systematic withdrawal plan in mutual fund schemes, the value of your fund is reduced by the number of units you withdraw. Thus, SWP is a good option for the Retirees and it can help them to get good money on their investments.

WealthBucket offers an extensive range of services related to the mutual funds, Equity Mutual Funds, Debt mutual fund, Large Cap mutual fund or Multi-Cap mutual fund.

Call us at +91 9999379929. Or email your queries at contact@wealthbucket.in.

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