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:
With an SWP plan, investors get the flexibility to choose the amount, date and frequency of withdrawals according to their requirements. In addition, an investor can choose to stop the SWP at any time and can add additional amounts to the fund.
Investors benefit from regular income through Systematic Withdrawal Plans. This is extremely useful for those in need of steady cash flow to meet monthly expenses and be stress-free.
An SWP does not attract tax deducted at the source. However, capital gains will attract tax based on the withdrawal amount and scheme.
By opting for an SWP, you get the benefit of rupee cost averaging. As mentioned earlier, during a bull market, you will redeem lesser units compared to a bear market. This averages out your returns on a long-term basis.
Also Read: Best SWP Mutual Funds To Invest In 2022
You may invest in a Systematic Withdrawal Plan if you are an:
If you are thinking about starting an SWP and investing in mutual funds, you can consider Navi as an ideal choice. With our technology-driven approach, you will not have to worry about higher costs. Visit Navi Mutual Fund and start investing to reach your financial goals.
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.
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.
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.
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.
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.
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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