What is SWP in Mutual Funds?

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Decoding the Systematic Withdrawal Plan

Key Takeaways

• SWP stands for Systematic Withdrawal Plan
• You can withdraw your Mutual Fund Investments in a structured manner with SWP.
• You can choose the amount, frequency, and duration of withdrawal with SWP.
• You can safeguard your Mutual Fund investment from market volatility with SWP.
• You may withdraw only capital gains earned or a fixed amount.

Mutual Funds have always been a popular investment choice among all types of investors. Today, you can invest in a wide variety of mutual funds and redeem them conveniently. One way to redeem your funds periodically is SWP. Let us understand what is SWP in Mutual funds in this article.

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Understanding SWP Meaning In Mutual Funds

A systematic withdrawal plan (SWP) is a structured method for withdrawals in Mutual funds. SWP in Mutual Funds allows you to make withdrawals at regular intervals, i.e., weekly, monthly, quarterly, semi-annually or annual, depending upon your requirement.

The amount of withdrawal can be both variable and fixed amounts. With SWP, you may withdraw only the capital gains earned or a fixed amount from your investment.

Why Is Systematic Withdrawal Plan a Wise Investment Strategy?

• Systematic Withdrawal Plan is tax efficient.
• You need not pay tax deduction at source (TDS) on redemption.
• Mutual fund schemes are subjected to market risks.
• Market changes directly influence the Net Asset Value (NAV)of your investment.
• SWP in Mutual funds allows you to take your money out on time before it erodes, minimising damage considerably.

How Does SWP In Mutual Fund Work?

Here is an example to help understand how a Systematic Withdrawal Plan works.

Assume you have 8,000 units in your Mutual fund, and you wish to withdraw INR 5,000. The NAV of your investment is INR 10 for each unit. On calculation, you will need 400 units to withdrawal INR 4,000. Post withdrawal, you will have 7,600 units.

Now, if your NAV of investment rises to INR 20, you will need 200 units to withdraw INR 4,000. Post withdrawal, you will have 7,350 units left with you.

With each withdrawal, the total number of units you hold decreases. Higher is the NAV of your investment, the lesser units you will need, and vice-versa.

Taxation For SWP In Mutual Funds

Redemption through a systematic withdrawal plan in Mutual funds is taxable.

For equity funds

If your holding period is less than a year, your investment will be considered a short-term one. Here you will be taxed a Short-Term Capital Gains tax (STCG) of 15 per cent. Conversely, if your holding period exceeds more than a year, you will be liable to pay a Long-Term Capital Gains (LTCG) tax of 10 per cent.

For debt funds

In case your holding period is under three years, it will be considered a short-term investment. The capital gains from the same will be added to your total income, and you will be taxed according to the tax slab you are eligible. On the other hand, if your holding period is more than three years, you must pay an LTCG tax of 20 per cent after indexation.

Conclusion

Opting for SWP in Mutual Funds helps you meet your financial needs with ease as these withdrawals are thoroughly planned and phased out. SWP enables you to access your funds at the right time - when you need them the most.

If you want to invest in mutual funds, download the digibank by DBS app today and choose from over 200 schemes!  Also, open your savings account online with us.

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*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.