SWP in Mutual Fund

SWP stands for Systematic Withdrawal Plan, which is a mutual fund investment strategy that allows investors to withdraw a fixed amount of money from their investments regularly. The formula for calculating SWP is A = PMT ((1+r/n)^nt – 1) / (r/n)). SWP withdrawals may attract capital gains tax, depending on the holding period and investor's tax slab.
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What Is Systematic Withdrawal Plan (SWP)
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3 min
14-Feburary-2025

Every individual has unique financial needs, leading to different investment preferences. While some prefer lump sum investments, others opt for a Systematic Investment Plan (SIP) to invest gradually. Similarly, some investors focus on capital growth, while others prioritize regular income. To cater to these diverse goals, fund houses offer various tools and facilities. One such option is the Systematic Withdrawal Plan (SWP). This article explores key aspects of SWP that investors should know.

What is a systematic withdrawal plan (SWP) in mutual fund?

A Systematic Withdrawal Plan is an investment redemption strategy that is commonly used in mutual funds. Here, you withdraw only a fixed portion of your mutual fund corpus at periodic intervals. You can decide the percentage of the corpus that you want to redeem as well as the frequency at which you want to redeem it.

This is different from traditional investment redemption, where you sell all your mutual fund units at one go and withdraw the entire corpus as a lump sum. When you opt for a SWP in mutual funds, you can choose to withdraw a fixed number of units at periodic intervals or a fixed percentage/amount of your capital. For example, say you have a mutual fund corpus of Rs. 5 lakhs, and the fund earns 12% returns on average per year. If you implement a SWP to withdraw Rs. 50,000 annually, then, at the end of the first year, the fund balance will be Rs. 5,10,000 (i.e. a growth of Rs. 60,000 or 12% coupled with a withdrawal of Rs. 50,000).

How does a SWP work?

A Systematic Withdrawal Plan is quite easy to set up nowadays. You can instruct your preferred mutual fund house or stock broker to set up a SWP for your investments from a specified date. You must also choose the withdrawal amount and the withdrawal frequency. Thereafter, the corpus built up over the investment tenure will be withdrawn systematically as per your instructions and credited to the bank account provided.

Let us discuss an example to further understand how SWPs work. Suppose you have a total investment of Rs. 10 lakhs in mutual funds, divided into 1,00,000 units of Rs. 10 each. You decide to redeem Rs. 5,000 per month. Here is how your SWP will work out during the next six months.

Month

NAV per unit

SWP Amount (Rs.)

Units Redeemed

Units Left

Month 1

10.30

5,000

485

99,515

Month 2

9.70

5,000

515

99,000

Month 3

11.50

5,000

434

98,566

Month 4

12.30

5,000

406

98,160

Month 5

10.60

5,000

471

97,689

Month 6

9.80

5,000

510

97,179

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Key features of a Systematic Withdrawal Plan (SWP)

 

  • Regular Withdrawals: SWP allows you to withdraw funds at scheduled intervals, ensuring a steady flow of income.
  • Flexibility: You have the freedom to decide the withdrawal amount, frequency, and the duration of the plan based on your financial needs.
  • Compounding Advantage: Since not all units are withdrawn at once, the remaining investments continue to grow, benefiting from compounding returns.
  • Disciplined Strategy: SWP promotes a structured withdrawal method, helping to manage funds more effectively and preventing rapid depletion of your investment.
  • Rupee-Cost Averaging: Regular withdrawals may help smooth out the cost of your investments, reducing the effect of market fluctuations over time.

Advantages of a Systematic Withdrawal Plan

If you are unsure about choosing between a lump sum withdrawal and a SWP in mutual funds, let us explore the benefits of the latter. This will help you make an informed choice.

Suitable in a bull market

If the market is bullish at the end of your investment tenure, a SWP can help you capitalise on the upward price movements while still redeeming a part of your corpus. The mutual fund units that are yet to be redeemed will continue to accumulate and appreciate because of the bullish run.

Supports disciplined withdrawals

Choosing to withdraw small sums periodically can foster investment discipline. It prevents impulsive lump sum withdrawals and helps you avoid spending the entire capital in one go. Since you only have access to your funds in small amounts, you can use the money more prudently.

Gives you a predictable income

Opting for a Systematic Withdrawal Plan can give you access to a steady stream of income. This can act as supplementary income if you are still working. Alternatively, it can help replace a part of your primary income when you retire. All the while, your unredeemed mutual fund investments may continue to grow based on the market movements.

It helps avoid timing the market

If you choose to make a lump sum withdrawal, you need to study the market and pinpoint the ideal time to exit your mutual fund investments. If the market rises after the mutual fund redemption, you may suffer from seller’s remorse. Timing the market can also be tricky and incredibly challenging. By choosing an SWP instead, you avoid all this hassle.

The benefit of rupee cost averaging

Rupee cost averaging is a key strategy in investment, particularly relevant to Systematic Investment Plans (SIPs) and Systematic Withdrawal Plans (SWPs). This approach involves investing or redeeming a fixed amount at regular intervals, regardless of the market conditions. The primary benefit of rupee cost averaging is its ability to mitigate the impact of market volatility, thereby optimising returns over time.

In the context of SIPs, rupee cost averaging allows investors to purchase more units when prices are low and fewer units when prices are high. This results in a lower average cost per unit over the investment period. Consequently, when the market eventually rises, the investor can benefit from significant gains as the value of their accumulated units appreciates.

Similarly, SWPs benefit from rupee cost averaging through the systematic redemption of mutual fund units. By redeeming a fixed amount regularly, investors are likely to sell their units at various price points, both high and low, over time. This strategy helps in averaging out the sale prices, potentially leading to a higher overall average sale price per unit during favourable market phases. As a result, the net returns for the investor can increase, providing a more stable and potentially higher income stream.

Rupee cost averaging also reduces the emotional impact of market fluctuations. Investors are less likely to make impulsive decisions based on short-term market movements, as their investment or redemption is automated and consistent. This disciplined approach can lead to more rational investment behaviour and better long-term results.

Moreover, rupee cost averaging is particularly beneficial for those with a long-term investment horizon. Over time, the effects of market volatility tend to smooth out, and the average cost per unit can become advantageous. This strategy is well-suited for investors seeking to build wealth steadily without the need for constant market monitoring or timing the market.

In summary, rupee cost averaging, whether through SIPs or SWPs, provides a practical and effective way to manage market volatility, enhance potential returns, and promote disciplined investment behaviour. It is a valuable strategy for achieving long-term financial goals with reduced risk.

Tax Benefits

When you redeem your mutual fund holdings via a SWP, you may earn capital gains on the redemption. These capital gains are taxed based on the type of mutual funds redeemed and their period of holding. W.e.f July 23, 2024, the classification of mutual fund profits as long-term or short-term capital gains and the taxation rules involved are as follows:

Type of Mutual Fund

Short-Term Capital Gains (STCG)

Long-Term Capital Gains (LTCG)

Taxation

Equity funds and aggressive hybrid funds that invest over 65% in equity

If held for less than 12 months

If held for 12 months or more

STCG is taxed at 20% and LTCG is taxed at 12.5% without indexation benefits

Debt funds and conservative hybrid funds that invest 35% or less in equity

No effect of the holding period on the classification or taxation of the capital gains earned

All capital gains are taxed at the income tax slab rate applicable to the investor

Other funds that invest more than 35% but less than 65% in equity)

If held for less than 36 months

If held for 36 months or more

STCG is taxed at the income tax slab rate applicable and LTCG is taxed at 20% with indexation benefits

 

 Formula to calculate systematic withdrawal plan (SWP returns

The estimated returns for an SWP can be calculated using the following formula:

A = PMT ((1+r/n)^nt-1)/(r/n))

Where:

  • A = Final investment value
  • PMT = Withdrawal amount per period
  • r = Expected rate of return (as a decimal)
  • n = Compounding frequency
  • t = Investment duration (in years)

Example Calculation

If you set up an SWP with the following details:

  • Initial Investment: Rs. 5,00,000
  • Duration: 5 years
  • Monthly Withdrawal: Rs. 8,000
  • Expected Annual Return: 12%

Using the formula, the results would be:

  • Total Withdrawals: Rs. 4,80,000
  • Final Value: Rs. 2,38,441

This final value represents the remaining investment balance after five years, assuming a 12% annual return.

Who can benefit from a systematic withdrawal plan (SWP)?

For those seeking a regular source of secondary income

If you are looking to create an additional income stream from your long-term investments, a Systematic Withdrawal Plan (SWP) could be an ideal solution. By investing in mutual funds and setting up an SWP, you can withdraw a fixed amount of money at regular intervals, such as monthly or quarterly. This can help you manage the rising cost of living and ensure a steady flow of secondary income.

For those focused on capital protection

Risk-averse investors can benefit from SWPs by choosing moderate or low-risk mutual fund schemes. With this approach, you can withdraw only the capital gains, leaving your principal investment relatively untouched. For example, if you invest in an arbitrage fund, you can receive the capital appreciation regularly through an SWP, while your initial investment remains at almost zero risk.

For those wanting to create their own pension

If you don't have a pension plan, you can create your own pension using an SWP. By investing your retirement corpus in mutual funds that match your risk profile, you can withdraw a regular income at a frequency that suits you. This way, you can start an SWP upon retirement and enjoy a steady income stream, effectively creating your own pension.

For those in a high tax bracket

High-income investors often find SWPs advantageous because there is no Tax Deducted at Source (TDS) on the capital gains. Additionally, the capital gains from equity or equity-oriented funds are taxed at a moderate rate. Gains from debt-oriented funds also benefit from moderate taxation due to the allowance of indexation on long-term capital gains.

Effective uses of a SWP in mutual funds

You can use a systematic withdrawal plan for various purposes such as:

  • Pension benefits: You can use the period withdrawal amounts as a substitute for or addition to your pension income after you have retired. The amount withdrawn periodically can help you meet your everyday expenses and ensure that you can maintain the required standard of living even after you retire.
  • Securing an additional source of income: Even if you have not retired, having an additional source of income during your working years can be a convenient financial cushion. The periodic income via your SWP can help you pay off your debts faster or add to your household income in other ways.
  • Capital protection: Withdrawing your mutual fund investments through a SWP helps protect your capital during the withdrawal phase. You can move the remaining corpus to a stabler option like arbitrage funds or debt funds and ensure that the wealth created remains intact even during the withdrawal period.

How SWP and the 4% rule can ensure a comfortable retirement

The 4% rule is a popular guideline for retirees seeking to determine how much they can safely withdraw from their retirement savings each year. This rule suggests that withdrawing no more than 4% of your retirement corpus annually can help ensure your savings last throughout your retirement.

How the 4% Rule Works

  1. Calculate Your Retirement Corpus: Estimate your total retirement savings, including contributions from various sources like pensions, investments, and savings accounts.
  2. Determine Your Annual Withdrawal: Multiply your retirement corpus by 4% to determine your annual withdrawal amount. For example, if your retirement corpus is Rs. 35,00,000, your initial annual withdrawal would be Rs. 1,40,000.
  3. Adjust for Inflation: To account for rising living costs, increase your annual withdrawal by the expected inflation rate each year. For instance, if the inflation rate is 3%, your withdrawal in the second year would be Rs. 1,44,200.

Example

Age

Year

Start Balance

Withdrawal

Gain

Balance

Cost of Living

60

1

Rs. 35,00,000

Rs. 1,40,000

Rs. 2,00,000

Rs. 35,60,000

0.03

70

11

Rs. 42,00,000

Rs. 1,68,000

Rs. 2,50,000

Rs. 43,82,000

0.03

80

21

Rs. 51,00,000

Rs. 2,04,000

Rs. 3,00,000

Rs. 52,06,000

0.03

90

31

Rs. 60,00,000

Rs. 2,40,000

Rs. 3,50,000

Rs. 61,10,000

0.03

While the 4% rule provides a helpful starting point, it's essential to consider these factors and adjust your withdrawals accordingly to ensure a comfortable and financially secure retirement.

Why investors may opt for SWP in a rising market

In a growing market, many investors are eager to book profits by selling their mutual fund units. However, this strategy can limit long-term capital appreciation. A Systematic Withdrawal Plan (SWP) offers a smarter approach, allowing investors to enjoy market gains while maintaining regular income.

When markets rise, the value of mutual fund units increases, tempting investors to withdraw funds. However, selling too many units at once can deplete capital and reduce future earnings. SWP enables controlled withdrawals, ensuring that a portion of the investment remains to benefit from continued market growth.

For instance, an investor who initiated an SWP before a market uptrend would experience higher withdrawals due to the increased unit value. This approach helps balance capital preservation and cash flow needs.

Moreover, selling a large portion of investments at once exposes investors to market timing risk. SWP spreads withdrawals over time, helping investors exit at favorable price points while maximizing returns.

Markets can be volatile even during upward trends. Withdrawing a lump sum during a downturn can result in significant losses. SWP mitigates this risk by distributing withdrawals, allowing investments to recover in future market upswings.

Before opting for an SWP, it is essential to invest in well-performing mutual fund schemes that can generate returns exceeding inflation. Investors should select funds based on their risk tolerance, investment horizon, and financial goals to ensure a sustainable withdrawal strategy.

How to effectively plan your SWP

To ensure a steady income through Systematic Withdrawal Plan (SWP), the safest approach is to invest a Rs. 2 crore SIP corpus into a debt fund, preferably a short-duration bond fund, after 20 years. Debt funds offer stable returns, making them ideal for SWP.

Assuming a 5% annual return on a Rs. 2 crore debt fund corpus and withdrawing Rs. 1.5 lakh per month, the funds will last 16 years. To extend withdrawals for 20 years, the monthly payout should be reduced to Rs. 1.3 lakh.

Strategy to sustain Rs. 1.5 lakh withdrawals for 20 years

  1. Invest Rs. 25,000 per month in an SIP for 20 years, which will grow to Rs. 2 crore, assuming a 12% return.
  2. In the 20th year, allocate Rs. 1 crore to a debt fund, setting up an SWP, while keeping the other Rs. 1 crore in an equity fund.
  3. The Rs. 1 crore in the debt fund will last 6.5 years with Rs. 1.5 lakh monthly withdrawals.
  4. Keep the equity fund investment untouched for 5 years, then move it to a short-duration debt fund for 1 year.
  5. After 6 years, the corpus will grow to approximately Rs. 1.75 crore.
  6. Set up a new SWP on this corpus, which will then last for 14 more years, ensuring a total of 20 years of withdrawals at Rs. 1.5 lakh per month.

Should you opt for a SWP?

A Systematic Withdrawal Plan may not be suitable for all investors. However, it may be a good choice for you if you:

  • Need a regular stream of income
  • Want to manage market risks using regular withdrawals
  • Want to maintain some investment exposure while also withdrawing a part of your corpus
  • Are looking for flexibility in your investment withdrawals
  • Want to transition smoothly from investments to redemption
  • Want to continue to benefit from a bull market

Tips before starting your SWP journey

Before you start a Systematic Withdrawal Plan, it's important to assess your financial needs carefully. Specifically, consider factors like inflation and the need for emergency funds. As a tip, do not base your decision solely on how well an investment has performed in the past. Instead, pay attention to current market conditions that could impact your future returns.

Additionally, consider whether you should choose the growth or dividend options for your investments. Be aware that this choice affects how much money you make and the taxes you pay. By picking the right option based on your financial situation and tax obligations, you can maximise your returns from the SWP.

Key takeaways

  • A systematic withdrawal plan (SWP) is a strategy to redeem your mutual fund investments systematically, by withdrawing a small portion of the corpus over an extended period.
  • It helps preserve the capital earned over the investment tenure and allows you to earn further returns on the balance corpus during the SWP period.
  • The amount you need to withdraw depends on your post-retirement financial requirements and the other investments you have accumulated by then.

Conclusion

Now that you know the meaning of SWP in mutual funds, how it works and why it is beneficial, you can decide whether this strategy is suitable for you. This withdrawal strategy is very similar to the Systematic Investment Plan (SIP), in which you invest in mutual funds at regular intervals. If you are just getting started with mutual funds, a SIP calculator can help you create an effective investment strategy.

You can also check out the 1,000+ mutual fund schemes available on the Bajaj Finserv Mutual Funds Platform. To find the scheme that is best for you, you can compare mutual funds, understand their features and benefits and make an informed decision. If you have a large amount of liquid capital in hand, you can even make a lump sum investment in any mutual fund.

Essential tools for all mutual fund investors

Mutual Fund Calculator

Lumpsum Calculator

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Nippon India SIP Calculator

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Frequently asked questions

What is the meaning of SWP In mutual funds?

A Systematic Withdrawal Plan (SWP) in mutual funds allows investors to withdraw a fixed amount of money at regular intervals. This provides a steady income stream from their investment, offering flexibility and control over the timing and amount of withdrawals, which can be tailored to meet specific financial needs or goals.

Is SWP a good option for me?

A systematic withdrawal plan may be suitable for you if you do not need to withdraw your entire investment at one go and you want to continue to benefit from market-linked returns while also redeeming a few units periodically.

What is the 4% SWP rule?

According to the 4% SWP rule, you should withdraw 4% of your mutual fund corpus in the first year of redemption. Then, each year, you need to withdraw the same sum after adjusting it for inflation.

Are SWPs tax-free?

No, SWPs in mutual funds are not tax-free. The tax benefits, if any, depend entirely on the type of fund and the period of holding.

What is the rate of return from a SWP?

The rate of return from a SWP is not fixed and depends on the performance of the underlying mutual fund. It varies based on market conditions and the fund’s growth. While the withdrawal amount is fixed, the returns can fluctuate, impacting the overall value of the investment over time.

Is there any risk in SWP?

Some of the limitations of SWPs in mutual funds include continued exposure to market risk, inflation risk and longevity risk, which is the possibility that the funds may be exhausted sooner than expected.

What are the disadvantages of a SWP?

A Systematic Withdrawal Plan is generally beneficial. However, if the NAV is declining, you may need to redeem or liquidate more fund units to ensure your withdrawal preferences are met.

Is a Systematic Withdrawal Plan risky?

No. On the contrary, a Systematic Withdrawal Plan is designed to help you manage risks. It helps you earn further returns on the remaining corpus and minimises the risk of timing the market.

What are SWP interest rates?

There are no fixed interest rates in SWPs. The mutual fund units remaining after each withdrawal may grow or lose value depending on how the underlying assets in the fund perform.

Can a SWP be stopped or modified at any time?

Yes, you can modify your Systematic Withdrawal Plan at any time to increase the withdrawal amount or rate. You can even stop your SWP or make additional investments.

Which is better: a SIP or SWP?

A Systematic Investment Plan (SIP) is the opposite of a Systematic Withdrawal Plan (SWP). If you are still in the process of building a retirement corpus and creating wealth, a SIP can help you achieve your goals in a disciplined manner. Alternatively, if you are closer to retirement or have already retired, a SWP can offer you a regular stream of income.

How do I choose between FD interest and SWP payouts?

Fixed deposits offer fixed interest on the amount deposited. If you have a lump sum amount to invest today, FDs can help you earn steady income in your post-retirement years. SWPs can also be considered as a supplementary income source as they offer variable payouts depending on the investment value.

Is SWP better than FD?

SWP may be better than a Fixed Deposit (FD) for investors seeking potentially higher returns and regular income. Unlike FDs, which offer fixed interest rates, SWPs benefit from market growth. However, FDs provide guaranteed returns and capital safety, making them more suitable for conservative investors prioritising security over returns.

What are disadvantages of SWP?

Disadvantages of SWP include market risk, as returns are not guaranteed and depend on fund performance. There's also a potential for capital depletion if withdrawals exceed returns. Additionally, SWPs may incur exit loads and tax implications, which can impact overall returns. Investors must carefully manage and monitor their withdrawals to avoid exhausting their investment prematurely.

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Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

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