Systematic Withdrawal Plan is multi-faceted. If you are looking for a plan which offers some flexibility in terms of amount invested, returns and tax benefits, then SWP should be your choice.
Systematic Withdrawal Plan facility allows investors to withdraw a specific amount, fixed or variable from their mutual fund investment at a regular interval. It is a good option for those looking for income at fixed intervals, monthly, quarterly, semi-annually or annually as per the needs.
Intuitively, Systematic Withdrawal Plan is opposite of Systematic Investment Plan. In a SIP, an investor invests in installments and through SWP, an investor customize the cash-flows according to their need.
Why should you consider a systematic withdrawal plan?
If you have approached retirement or you need funds for your travel plans or other constant needs, this plan can be used to create a flow of income which is regular.
How does a systematic withdrawal plan work?
Suppose you have invested Rs. 100,000 in a mutual find scheme procuring 10,000 units. If you wish to withdraw Rs. 10,000 from this scheme then 1000 units will be sold assuming the NAV of the mutual fund remains at Rs. 10. You will be left with 9000 units.
Now, if the NAV of the fund increases to Rs. 20 then, the withdrawal of Rs. 10,000 would mean selling 500 units. Your fund will have 8500 units.
So, the exhaustibility of your investment amount depends on the performance of the fund your money is parked in. The increase in NAV will lead to a decline in the redemption of units and as the NAV falls, more units will be redeemed.
What is the unique selling point of this investment plan?
The withdrawals known as redemption is not subject to tax deduction at source. However, the capital gains are taxed on the amount withdrawn. The wisest thing to do is to set up withdrawal in such a way that you draw only the appreciation made on the investment amount. Your capital remains intact, while you enjoy the periodic dividends. Here are some unique features of an SWP.
1. Perpetual Investment
Suppose that you have invested Rs. 20 lacs in the fund and the fund gives you a return of 9% p.a. If you opt for an SWP of Rs. 20000 per month then the fund will last you around 182 months. However, if your withdrawal is less than the expected rate of return, then the SWP can run to perpetuity.
2. Flexible options
There are fixed income products like Senior Citizen Saving Schemes, Post Office Monthly Income Scheme, and National Saving Certificates. However, there is a limitation on account of the maximum amount that can be invested, the lock-ins and tax are deducted if interest amount is more than Rs. 10000.
other investment instruments with monthly income plans, paying dividends do not have a fixed frequency. If you opt for a dividend debt mutual fund, you may not be paid dividends if there is no appreciation.
4. Tax Implications
If your holding period of the investment plan is less than 36 months then the amount that you withdraw will be taxed as short-term capital gain according to the income slab. If the holding period is more than 36 months then, then the amount you withdraw will be subject to long-term capital gains tax. Also, long-term capital gains from equity mutual fund are exempt in case of holding beyond a year.
5. Inflation shield
The risk-free income instruments are safe but they do not offer inflation-beating returns. The systematic withdrawal plans offer returns to keep a check on inflation.