A Systematic Withdrawal Plan, also known as SWP, is an investment feature in mutual funds, which allows investors to withdraw funds from their existing investments. Such withdrawals can be made in fixed amounts at regular intervals, such as monthly, half-yearly, quarterly or annually.
The best part of SWP mutual funds is you can choose the amount you want to invest and the withdrawal frequency. Here are all the details about SWP mutual fund – how it works, benefits, taxation and things to keep in mind before investing. Read on!
An SWP allows investors to withdraw a fixed amount at regular intervals from their investments in a particular mutual fund scheme. Thus, when an investor opts for SWP, he/she receives his/her own money from the ongoing investment through the liquidation of units.
Payments via SWP continue as long as you hold units, provided the SWP duration is not given.
For example, suppose you made a lump sum investment of Rs. 1,00,000 in a mutual fund with a NAV (Net Asset Value) of Rs. 5. So, you will have 20,000 units of this scheme.
Now, let’s say that you want to withdraw Rs. 2,000 every month. For this, the fund will sell units worth Rs. 2,000. Suppose you opt for an SWP a year after, and the NAV on the date of withdrawal is Rs. 20. Here, the fund will have to sell 100 units to pay you Rs. 2,000. As a result, your unit holding will decrease to 19,900 (20,000 – 100).
As you can see, the unit balance tends to reduce with time in an SWP. However, if the NAV (Net Asset Value) increases at a higher percentage than the withdrawal rate, it will lead to an appreciation in the investment value. Similarly, if the NAV falls, it will negatively affect your investment. This is because you will be redeeming more units from your fund in a situation where NAV falls.
Here’s a list of benefits of investing in SWP mutual funds:
You may invest in a Systematic Withdrawal Plan if you are an:
Here are certain factors that you must consider before investing in mutual funds:
Systematic Withdrawal Plan attracts tax when you redeem the units. Your capital gains earned through a scheme are either short-term or long-term in nature. The nature of capital gains and the type of fund decides the tax implications on SWP. This is explained below:
Short-term capital gains (earned when units are redeemed within 12 months) are taxable at 15%. On the other hand, long-term capital gains (earned when units are redeemed after 12 months) are taxable at 10%. Note that long term capital gains are not eligible for taxation if the amount is under Rs. 1,00,000.
In the case of debt funds, short-term capital gains attract tax as per the tax slab of an individual. Meanwhile, long-term capital gains are eligible for 20% tax after indexation.
SWP in mutual funds is a great way to earn a regular income and meet your financial obligations. However, before proceeding with a Systematic Withdrawal Plan, consider knowing all details regarding its working and make an informed decision. If you are ready to invest in mutual funds, visit Navi Mutual Fund to get started today!
*Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
Ans: No, in an SWP, you get to choose the withdrawal amount. You can select an amount as per your requirements. Additionally, you also get the option to receive this amount either annually, half-yearly, quarterly or monthly.
Ans: No, for Indian residents, tax deducted at source is not applicable on SWP. However, you will have to pay tax for the short-term or long-term capital gains that you had earned by redeeming the units of that particular mutual fund scheme.
Ans: To redeem your units, simply log in on the online transactions page of your fund with your PAN or portfolio number. After that, select the scheme and the number of units that you wish to redeem and execute your transaction.
Ans: A Demat account helps in holding multiple securities, including bonds, mutual funds and stocks in an electronic form. However, it is not mandatory to have a Demat account to invest in mutual funds.
Ans: The Net Asset Value (NAV) denotes the performance of a mutual fund scheme. Simply put, NAV is the market value of the securities that a mutual fund holds. The amount of returns you earn from a mutual fund scheme depends on the rise/fall in NAV.
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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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