What is SWP? Who should opt for it?

By now, most of you must be knowing what an SIP is. For those who don’t know, SIP or Systematic Investment Plan is an investment route offered by mutual funds wherein you can invest a fixed amount in a mutual fund at regular intervals. 

SIPs help you average the cost of buying, thus you don’t need to time the market. The idea behind SWP, or Systematic Withdrawal Plan, is the same as that of the SIP- investors shouldn’t be beaten by fluctuations in the market. Thus, SIPs and SWPs, ensure you make investment and withdrawal, respectively, in a controlled manner rather than trying to time the market, which is usually not a successful move. 

What SWP does is that is allows an investor to withdraw some amount from his/her investment. SWPs can be of two types: 

Fixed withdrawal wherein units worth a fixed amount, as determined by you, are sold every month and transferred in to your account,

Appreciation withdrawal wherein the gains made by the mutual fund scheme from the time of investment is redeemed. 

SWP is apt for those who invest in mutual funds looking for a regular income. While the fund house aims to give consistent dividends, the dividends are subject to market movement and how the fund has performed in the existing market. It must be noted, however, that mutual fund houses do not guarantee any returns or dividends. 

If you want regular income you can invest in the growth plan of any scheme and specify a certain fixed amount as the pay-out for every month. Then on that date, the units worth the specified amount would be redeemed. 

The redemption of units works on a First In, First Out (FIFO) basis. This means that the units that were first purchased are redeemed first. This is important because it helps make your mutual fund investment tax friendly. 

The FIFO way of redemption is of utmost importance in SWP as the tax to be paid on redemption will depend on the tenure of your holding and nature of the fund invested in.

- In equity funds, if the units that have been redeemed have a holding tenure less than one year, then the investor will have to pay short-term capital gains (STCG) tax. 

- If equity fund units with a holding tenure of over a year are redeemed, then capital gains tax will be applicable on gains over Rs. 100,000. 

- In case of a debt mutual fund, the short-term capital gains tenure is three years and the tax applicable will be as per the investor’s tax slab. 

- However, units held for over three years qualify for long-term capital gains tax, with indexation benefits.

Thus, SWP is a good investment option for those individuals who are nearing their retirement age. This helps as at a time of no regular income, you will continue to get some capital from your mutual fund investments and that too, on a regular basis. What’s even better, is that the bulk of your corpus will continue to be invested in the market while only the amount you specify, and need, will be redeemed.