The full form of SWP is Systematic Withdrawal Plan.
A Systematic Withdrawal Plan (SWP) is a facility offered by mutual funds that allows investors to withdraw a fixed sum of money from their investments at regular intervals. This is essentially the reverse of a Systematic Investment Plan (SIP), where you invest a fixed amount regularly.
Key Features of a Systematic Withdrawal Plan (SWP)
- Regular Income: Provides a steady stream of income, making it suitable for retirees or those seeking regular payouts.
- Fixed Withdrawals: You can choose the amount and frequency (monthly, quarterly, etc.) of withdrawals.
- Flexibility: You can modify or stop the withdrawals as per your needs.
- Tax Efficiency (potentially): Only the gains portion of the withdrawal is taxed, and the tax implications depend on the type of mutual fund (equity or debt) and holding period.
- Continued Growth: Your remaining investment continues to grow, potentially offsetting the withdrawn amount.
Example
Imagine you have ₹500,000 invested in a mutual fund and want to withdraw ₹5,000 every month. You can set up an SWP, and the mutual fund will automatically redeem units worth ₹5,000 from your investment and credit the amount to your bank account each month. The remaining ₹495,000 (initially) will continue to earn returns.
Advantages of SWP
- Regular Income Stream: Helps meet recurring expenses.
- Financial Planning: Allows for better management of finances.
- Disciplined Withdrawals: Prevents impulsive or unnecessary redemptions.
Disadvantages of SWP
- Erosion of Capital: Regular withdrawals can deplete your investment corpus over time, especially if the returns are low.
- Tax Implications: Withdrawals may attract taxes, reducing the overall returns.
- Market Risk: Investment returns can be affected by market fluctuations.
