What is Systematic Withdrawal Plan (SWP)?
A Systematic Withdrawal Plan (SWP) allows you to withdraw a fixed amount from your mutual fund investments at regular intervals (monthly, quarterly, or annually). Unlike redeeming your entire investment at once, SWP provides a steady income stream while keeping your remaining corpus invested.
SWP is the reverse of SIP (Systematic Investment Plan). While SIP helps you accumulate wealth through regular investments, SWP helps you utilize that wealth through planned withdrawals.
How SWP Works
When you set up an SWP, the mutual fund redeems units equivalent to your withdrawal amount each period. The remaining units continue to earn returns based on fund performance.
Key Insight: If your expected returns exceed the withdrawal rate, your corpus can potentially last indefinitely or even grow.
SWP Calculation Example
Consider ₹10 lakh invested with 8% annual returns and ₹10,000 monthly withdrawal for 5 years:
- Total Invested: ₹10,00,000
- Total Withdrawn: ₹6,00,000 (60 months × ₹10,000)
- Remaining Balance: ~₹7,61,000
- Returns Earned: ~₹3,61,000
Benefits of SWP
- Regular Income: Predictable cash flow for retirees or those needing periodic income.
- Tax Efficiency: Only gains portion is taxed, not the entire withdrawal. Long-term capital gains (LTCG) on equity funds are taxed at 10% above ₹1 lakh.
- Rupee Cost Averaging: You sell fewer units when NAV is high and more when NAV is low.
- Flexibility: Change withdrawal amount or frequency anytime.
- Inflation Hedge: Remaining corpus continues to grow, potentially beating inflation.
SWP vs Fixed Deposit: Which is Better?
| Feature | SWP | FD Interest |
|---|---|---|
| Returns | Variable (8-12%) | Fixed (6-7%) |
| Tax on Withdrawals | Only gains taxed | Entire interest taxed |
| Capital Preservation | Possible if returns > withdrawal | Principal intact |
Frequently Asked Questions (FAQs)
What is the minimum amount for SWP?
Most mutual funds allow SWP with a minimum withdrawal of ₹500-₹1,000 per month. The minimum investment varies but is typically ₹5,000 to ₹10,000.
Is SWP taxable?
Yes, but only the capital gains portion is taxed. For equity funds held over 1 year, LTCG above ₹1 lakh is taxed at 10%. For debt funds, gains are taxed as per your income slab.
Can my SWP corpus get exhausted?
Yes, if your withdrawal rate exceeds returns over time. Use a conservative withdrawal rate (4-5%) for long-term sustainability, especially for retirement planning.
Which funds are best for SWP?
Hybrid funds or balanced advantage funds are popular for SWP due to their moderate risk and stable returns. Debt funds are suitable for conservative investors.
Can I change my SWP amount?
Yes, most fund houses allow you to modify the withdrawal amount, frequency, or even pause the SWP. You can do this online or through your distributor.