The primary reason people invest is to grow their money and build wealth. It is possible, however, that you need an inflow of cash on a regular basis. It may be a way to supplement your income to meet higher lifestyle needs, or it may be your sole source of income. During retirement, for instance, you may require a steady income flow. This is where a Systematic Withdrawal Plan (SWP) can help you manage your money better. What is SWP? SWP is a facility that allows you to withdraw money from your mutual fund investments at predetermined and regular intervals. Let us assume you invest a lumpsum amount in a mutual fund. You can set up an SWP to withdraw funds regularly from your investment. The remaining balance will continue to grow. Think of an SWP as the opposite of a Systematic Investment Plan (SIP). In an SIP, you make regular contributions to a mutual fund of your choice. In an SWP, you make regular withdrawals.
You can set up your SWP to withdraw money from it on a monthly, quarterly, half-yearly or annual basis. You could also set up your SWP to only withdraw the gains while the capital continues to be invested. Example of an SWP Let us assume you invest Rs. 5,00,000 for a period of three years at a return of 10%. You set an SWP of Rs. 15,000 every month. At the end of three years, you would have withdrawn Rs. 5,40,000. You will still have an investment residual of Rs. 69,700. But it would be prudent to note that:
1) It is always better to start an SWP option from an equity fund after one year so that you can avoid STCG.
2) Let the equity fund to grow for at least for 3 years before you start the SWP as this time duration helps capital appreciation.
Advantages of an SWP Including an SWP in your investment plan can be wise if you need regular income. This could be during retirement, a sabbatical, or simply to supplement your current income.
Here are some advantages of SWP to consider:
1. Regular Income Flow: An SWP ensures a regular flow of income. Depending on your financial needs, you can set up your SWP how you like. The intervals of withdrawal can also be determined to suit your requirements. Liquidity : SWPs are highly liquid because the money hits your bank exactly when you want it to. No running around or making calculations to understand how to liquidate your funds to meet your financial obligations. All you need to do is set up your SWP and reap its benefits.
2. Flexible: SWPs are also highly flexible. You can change the withdrawal amount as per your needs. This may not be possible with other investments, where you may have to withdraw the entire amount. You can increase or decrease your withdrawal amount depending on your financial needs.
3. Ongoing Investment: One of the most significant advantages of an SWP is that the amount you do not withdraw continues to be invested. For instance, if you choose to withdraw only the gains that you make on your mutual fund investment, the capital will remain invested, giving it a chance to grow. This way, you can make withdrawals while continuing to grow your money.
4. Lower Tax Impact: The tax you pay on your SWP withdrawals is typically lower than other traditional investments. For instance, you will have to pay TDS on a fixed deposit closure. SWP withdrawals from a debt mutual fund instead are taxed with indexation benefits, making it possible for you to reduce your tax liability.
5. Retirement Plan: If you make regular contributions to a mutual fund during your working years, SWP can prove to be an excellent way to secure your retirement days. Unlike traditional pension or annuity schemes that provide low returns, you can enjoy market-linked returns on your investment while determining the exact money inflow you need.
Planning for an SWP
It would help if you planned proactively to employ an SWP to meet your financial requirements. You can use tools such as SWP calculators or standard retirement calculators to estimate how much you can withdraw. Using an investment calculator can help you plan out your withdrawals carefully while understanding how much money you make on your investment. SWP calculators and retirement calculators are available online for free. You will need to enter details such as the amount you want to invest, the period of investment, the amount of withdrawal, the frequency of withdrawal and the rate of return you expect.
Tax Implications of SWP
For debt category mutual funds, if you remain invested for less than 36 months, short-term capital gains tax will be levied according to your income tax slab rate. If you hold an invested amount for more than 36 months, your withdrawal will be taxed for the long term at 20%, subject to indexation. For equity funds, your withdrawal will be subject to shortterm capital gains tax for an investment period of less than 12 months. The tax rate will be 15%. For investments held for longer than 12 months, long-term capital gains tax at 10% will be applicable for above Rs.1 lakh gain. Equity fund withdrawals will not have the benefit of indexation.
Things to Consider While Opting For an SWP
1. SWP withdrawals differ from taking the interest on traditional investments such as fixed deposits. Here, you dip into your investment. If your investment does not make any returns, the withdrawal will come from your capital.
2. SWP withdrawals are subject to tax. You need to consider your withdrawal’s tax implication before adopting the investment strategy.
3. While SWPs help you determine your cashflows in advance, there may be variations depending on what mode you choose. If you choose to withdraw only the gains, the amount you receive may not be fixed.
Systematic Withdrawal Plans can be a good strategy to plan your retirement or get additional income. It is also a tax-efficient way to manage your income. The key is to plan your SWP optimally so that your investment continues to give you returns. You can speak to Geojit’s financial advisors to help you make an informed decision about how to employ SWP in the best possible way.