What are SWP Mutual Funds: Benefits and Taxation
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!
How Does SWP in Mutual Funds Work?
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.
Benefits of SWP Mutual Funds
Here’s a list of benefits of investing in SWP mutual funds:
- Provides Flexibility to Investors: 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.
- A Source of Regular Income: 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.
- Tax Benefits: An SWP does not attract tax deducted at the source. However, capital gains will attract tax based on the withdrawal amount and scheme.
- Rupee Cost Averaging: 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.
Should You Invest in SWP in Mutual Funds?
You may invest in a Systematic Withdrawal Plan if you are an:
- Investors looking for regular income – SWP is an excellent source of wealth creation through a secondary income source. It can also help individuals combat the rising living costs. Investing in mutual funds for the long-term and opting for an SWP might be a convenient way to steer clear of any financial crisis in the future.
- Individuals looking to create pension – An SWP could also be an ideal choice for investors who do not have any pension earnings. On retirement, one can start an SWP and opt for monthly, quarterly, half-yearly or annual withdrawals to create their own pension.
- Investors seeking capital protection – Risk-averse individuals can invest in low to moderate-risk schemes and then choose to receive only the capital gains as SWP. Such type of SWP is called appreciation withdrawal, wherein investors can only withdraw the returns earned.
Things to Keep in Mind before Investing in SWP Mutual Funds
Here are certain factors that you must consider before investing in mutual funds:
- Expense Ratio – Expense ratio is an annual charge that AMC levies on investors, which can significantly affect the returns you earn from your investment. Thus, you must always remember to choose a mutual fund that has a low expense ratio.
- Investment Objective – Determining your financial goals is a crucial step to take before putting money in a mutual fund scheme. Before investing, ensure whether you will be able to meet your financial goals through the scheme or not.
- Risk Appetite – As a matter of fact, the risk appetite of all investors cannot be the same. Know your risk-bearing capacity before investing in mutual funds, as the returns are impacted by market fluctuations.
- Fund Manager’s Experience – The performance of a fund depends on the decisions of the fund manager. Hence, it is crucial that you check the fund manager’s experience before taking any decision.
- Past Performance of the Fund – A fund’s previous performance indicates whether it was able to meet its goals or not. However, you must note that a fund’s past performance cannot determine how it will perform in the future.
- Type of Plan – Fund houses generally offer direct and regular plans. Direct funds feature a lower expense ratio than regular plans. So, before investing in a mutual fund, ensure to make a choice between the two.
Taxation of SWP 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:
1. Equity Funds
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.
2. Debt Funds
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.
Final Word
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.
FAQs
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.
