A systematic withdrawal plan (SWP) is a method of withdrawing a fixed amount of funds from your mutual fund investments at regular intervals. It provides a predictable and stable source of income for you.
Instead of withdrawing your investment in a lump sum, SWP enables you to systematically redeem units while the remaining portion of your portfolio generates continuous returns based on market performance. SWPs are especially useful if you are looking for a steady income stream after retirement or want regular cash flow.
Let’s learn more about what SWP is in mutual funds, its key features, who can use it and more.
What is SWP in Mutual Funds?
SWP full form is a systematic withdrawal plan. An SWP in mutual funds allows you to regularly redeem a portion of your investments to provide regular payouts. Understanding SWPs helps you plan your financial future and make the most of systematic withdrawals.
This helps to manage your financial requirements more effectively and also ensures that your remaining investment continues to grow over time. With SWP, you can customise the withdrawal amount, interval and duration of the plan based on your needs. You can also choose the amount, date, and frequency to receive income from an SWP and can stop it at any time.
Important Features of SWP
Here are some key features of SWP to keep in mind:
- Regular Withdrawals: Using the SWP feature, you can withdraw funds from your mutual funds at a scheduled interval to ensure a steady flow of income.
- Compounding Benefits: As you do not redeem all your funds at once, your remaining amount will continue to grow so that you can get compounded returns.
- Flexibility: You can get 100% freedom to decide your withdrawal amount, duration, and frequency of the SWP plan according to your financial needs.
- Rupee-Cost Averaging Benefit: Regular withdrawals help you to average out the cost of your investments by reducing the effect of market fluctuations over time.
Advantages of Using a Systematic Withdrawal Plan (SWP)
These are the advantages of using a SWP:
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Predictable and Regular Income
This is one of the most essential benefits of SWP. With an SWP, you can create a reliable source of income by withdrawing a fixed amount regularly. This predictability makes your budgeting and financial planning much easier and gives you stability and peace of mind as you manage your expenses.
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Flexible Withdrawals
An SWP provides flexible withdrawals as it allows you to customise the withdrawal amount and frequency to match your regular needs. This ensures that you can effectively manage your finances while enjoying your financial stability.
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Capital Appreciation
The systematic withdrawal plan (SWP) allows you to withdraw the profit from your invested capital while keeping your principal untouched. If you prefer to withdraw profits, SWP is a valuable option for you. As your capital remains invested, it allows you to benefit from further market appreciation while still enjoying regular income.
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Suitable For Bull Market
Even in a bull market, a SWP allows you to capitalise on rising prices while still enjoying regular withdrawals. If your annual withdrawal amount is less than the returns generated, your investment will last longer. SWPs are beneficial in bull markets because the remaining investments continue to grow, and you can benefit from compounding returns.
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No TDS Deduction
SWP withdrawals are not subject to Tax Deducted at Source (TDS) because they are treated as redemptions of investment units rather than income. However, withdrawals may still have tax implications depending on the nature of the investment and your tax slab.
Example of a Systematic Withdrawal Plan in Mutual Funds
Let’s calculate your SWP returns with a simple example and understand how does SWP work:
Aisha invested ₹5,00,000 in a mutual fund to get a steady income stream. She set up a SWP to withdraw ₹10,000 every month for 5 years.
The investment grew at an expected rate of 8% per year. At the end of the 5 years, despite having withdrawn ₹6,00,000 from her initial investment, Aisha was happy to find that her remaining investment was still worth ₹5,218.
Top SWP Mutual Funds in India
Follow this table to learn about some of the top mutual funds in India:
| Name | Minimum SIP (₹) |
| HDFC Balanced Advantage Fund | 100 |
| SBI Equity Hybrid Fund | 500 |
| ICICI Pru Balanced Advantage Fund | 100 |
| SBI Long-Term Equity Fund | 500 |
| DSP Aggressive Hybrid Fund | 100 (12 instalments) |
| Aditya Birla SL Balanced Advantage Fund | 100 |
| Kotak Equity Hybrid Fund | 100 |
| Tata Hybrid Equity Fund | 100 |
| Franklin India Balanced Advantage Fund | 500 |
| Mirae Asset Equity Savings Fund | 99 |
Who Can Be the Best User of SWP?
Let’s understand the types of investors who can make the most of this strategy.
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If You Want a Regular Secondary Income Stream
Investors familiar with the SWP know that it can serve as a reliable source of additional income from long-term investments. It can help to manage the rising living costs. By investing in these mutual funds, you can gain profits, and simultaneously, you can withdraw regularly from them because of SWP. Thus, you can create a consistent secondary income source with SWP, which is relatively easy.
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To Protect Your Capital
Low-risk investors can choose moderate or low-risk mutual fund schemes and withdraw only capital gains through an SWP.
For example, if you invest in an Arbitrage fund, you can receive regular capital appreciation via SWP by keeping your initial investment almost risk-free.
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If You Want to Set Your Pension
If you do not have a pension, you can use your retirement corpus to invest in schemes as per your risk tolerance so that you create a steady income. Through SWP, you can effectively create your pension after retirement.
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If You Fall Under Higher Tax Brackets
SWP is also beneficial if you are a high-income investor and want to avoid TDS on capital gains. Capital gains from equity or equity-oriented funds are taxed at a moderate rate, which results in a lower tax liability.
Tax Implications With SWP
When you redeem units to withdraw the SWP amount, it falls under capital gains (in case the redemption NAV is higher than the investment NAV) on the profits you made from the sale of units.
These capital gains are classified as either short-term or long-term based on the following conditions:
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Debt Mutual Funds
If you redeem the units within 24 months from the date of investment, it will fall under your short-term capital gains. After that, your profits will be considered as long-term capital gains. The gains will be included in your income and taxed according to the capital gains income tax rate.
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Equity Mutual Funds
If the units are redeemed within 12 months from the date of investment, your gains will be considered short-term and, after 12 months, will fall under long-term capital gains.
For STCG, you have to pay 20% short-term capital gains tax, and for LTCG, the first ₹1.25 lakh is tax-exempt, and after that, you are liable to pay 12.5% long-term capital gains tax.
Unlike traditional savings options such as Fixed Deposits (FDs), MIS, etc., mutual fund capital gains do not attract TDS if you are a resident individual.
Additionally, the interest income from FDs and most post office small savings schemes is taxed based on your income tax rate.
The SWP in mutual funds is more tax-efficient than receiving dividends. This is because the Asset Management Company (AMC) deducts a 10% TDS on dividends. Additionally, the dividends received by you are taxable.
Final Thoughts
SWP meaning is a Systematic Withdrawal Plan (SWP). Mutual funds are a smart and disciplined strategy for generating regular income. You can even structure your SWP to withdraw only the capital appreciation portion, making it a tax-efficient choice with no TDS on your gains—an advantage over traditional investment options.
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