Investing in mutual funds is a popular way to grow your wealth in India. Mutual funds offer a range of investment options that cater to different risk appetites and investment goals. One such investment option is the Systematic Withdrawal Plan (SWP). In this article, we will discuss what SWP is, how it works, its benefits, and its drawbacks.

What is a Systematic Withdrawal Plan (SWP)?

A Systematic Withdrawal Plan (SWP) is a facility offered by mutual funds that allow investors to withdraw a fixed amount of money at regular intervals from their mutual fund investments. The withdrawals can be made monthly, quarterly, half-yearly, or annually, depending on the investor's preference. The amount of withdrawal is pre-determined by the investor and can be changed at any time.

SWP is the opposite of a Systematic Investment Plan (SIP), where investors invest a fixed amount of money at regular intervals in a mutual fund scheme. In SWP, investors withdraw a fixed amount of money at regular intervals from their mutual fund investments.

How does Systematic Withdrawal Plan (SWP) work?

SWP works by redeeming a fixed number of units from the mutual fund scheme at regular intervals. The number of units redeemed depends on the amount of withdrawal and the prevailing Net Asset Value (NAV) of the mutual fund scheme. The NAV is the value of each unit of the mutual fund scheme on a particular day.

Let's understand this with an example. Suppose an investor has invested Rs. 1 lakh in a mutual fund scheme, and the NAV of the scheme is Rs. 50. The investor wants to withdraw Rs. 5,000 every month through SWP. The mutual fund scheme will redeem 100 units (Rs. 5,000/Rs. 50) every month from the investor's investment. If the NAV of the scheme increases to Rs. 60, the mutual fund scheme will redeem 83.33 units (Rs. 5,000/Rs. 60) every month from the investor's investment.

It is important to note that the number of units redeemed may vary depending on the prevailing NAV of the mutual fund scheme. If the NAV of the scheme increases, the number of units redeemed will decrease, and if the NAV of the scheme decreases, the number of units redeemed will increase.

Benefits of a Systematic Withdrawal Plan (SWP)

SWP offers several benefits to investors, such as:

• Regular income: SWP provides a regular income stream to investors, which can be useful for retirees or those who need a regular income.
• Flexibility: Investors can choose the amount and frequency of withdrawal as per their needs and can change it at any time.
• Tax efficiency: SWP is a tax-efficient way of withdrawing money from mutual fund investments. The gains from mutual fund investments held for more than one year are taxed at a lower rate of 10% (without indexation) or 20% (with indexation) compared to gains from investments held for less than one year, which are taxed at the investor's income tax slab rate.
• Capital appreciation: SWP allows investors to withdraw a fixed amount of money while keeping the remaining investment in the mutual fund scheme, which can continue to grow and appreciate over time.

Drawbacks of Systematic Withdrawal Plan (SWP)

SWP also has some drawbacks that investors should be aware of, such as:

• Market risk: SWP is subject to market risk, and the value of the investment may fluctuate depending on the performance of the mutual fund scheme.
• Withdrawal charges: Some mutual fund schemes may charge a fee for SWP, which can reduce the returns for investors.
• Not suitable for short-term goals: SWP is not suitable for investors who have short-term investment goals as it may not provide the desired returns in a short period.

Conclusion

A systematic Withdrawal Plan (SWP) is a useful investment option for investors who need a regular income stream from their mutual fund investments. It offers flexibility, tax efficiency, and capital appreciation. However, investors should also be aware of the market risk, withdrawal charges, and the suitability of SWP for their investment goals before investing in it. Investors should also consult a financial advisor before investing in mutual funds or any other investment option to understand their risk profile, investment goals, and the suitability of the investment option.