The Beginner’s Guide To Systematic Withdrawal Plans

By Adhil Shetty | April 20, 2017

The Beginner’s Guide To Systematic Withdrawal Plans

Mutual Fund investors know of Systematic Investment Plans or SIPs. It is a form of investing where investors authorise an AMC (Asset Management Company) to invest a fixed amount every month in a Mutual Fund of their choice.

This helps balance out market fluctuations through cost averaging with systematic investment. When the market goes down, you can buy more units of a Mutual Fund, and when the market goes up you can buy fewer units, but make capital gains on previously bought units. This disciplined investing is necessary for long-term wealth creation.

A systematic withdrawal plan or SWP, on the other hand, is the opposite of an SIP. With an SWP, an investor authorises his or her AMC to redeem a certain amount from their investment every month.

Additional Reading: 4 Ways To Evaluate A Mutual Fund 

Controlling Risks & Rewards

The idea behind an SIP or SWP is that investors shouldn’t be beaten by fluctuations in the market. They should make investments and withdrawals in a controlled manner rather than going down the lump sum route, which is fraught with risks.

For example, if an investor buys a Mutual Fund for Rs. 10 lakhs, but a market crash brings the fund’s NAV down by 30%, he will suffer a substantial loss and will have to wait for recovery before he can make redemptions. Similarly, in case of redemption, if the investor redeems all his money at once, he risks losing further appreciations. 

Types of SWP

There are two types of SWPs: fixed withdrawal and appreciation withdrawal.

In case of fixed withdrawal, Mutual Fund units worth a fixed amount are sold every month and the amount is credited to the bank account of the investor. In case of appreciation withdrawal, any gain made from the time of investment is redeemed.

Additional Reading: How Mutual Funds Work 

Great For Post-Retirement Income

The purpose of an SWP is to periodically allow you to withdraw from your investments. This may be useful when you have no regular income and are reliant on investments, such as during your retirement. SWPs allow you to remain invested in the bulk of your corpus while letting you redeem only what you need to spend.

Mutual Fund units are redeemed on a first in, first out (FIFO) basis, meaning the units purchased first are redeemed first. This is also a tax-efficient way to enjoy your investments. 

Tax Implication Of SWPs

The tax implications of an SWP are similar to the usual redemption of units of a Mutual Fund. Units are redeemed on a FIFO basis. However, the actual taxes to be paid will depend on the tenure and nature of the fund.

If the units redeemed have a tenure less than one year, the investor will have to pay short-term capital gains (STCG) tax at 15.45%. For units with a tenure longer than a year, there is no long-term capital gains (LTCG) tax, thus making the returns tax-free where securities transaction taxes have been paid.

In the case of a debt Mutual Fund, the STCG tenure is three years and the tax is as per the investor’s slab. Units held longer than three years qualify for LTCG tax, which is at 20.6% with indexation benefits. 

Conclusion

A disciplined investor also needs disciplined redemption. This is where SWPs come in. You can continue generating returns on your investment, but will also be able to withdraw what you need.

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Adhil Shetty

About Adhil Shetty

Adhil Shetty is the Founder and serves as the Chief Executive Officer of BankBazaar.com. Adhil has a Master’s degree in International Relations with a specialization in International Finance and Business from Columbia University in the City of New York, and a Bachelor’s degree in Engineering from the College of Engineering Guindy, Anna University. Adhil is an expert in Personal Finance (Car loan/Home loan and personal loan) and he majorly consults on investment and spends rationalization for the Indian loan borrowers. His guidance is number based with real time interest rate calculations and hence useful for consumer’s real time query.

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