What is a Systematic Withdrawal Plan (SWP)?

Some people invest in Mutual Funds for a regular income, and they usually look at options of getting a dividend. To cater to such investors, some mutual fund schemes, particularly in the debt category, offer Income Distribution cum Capital Withdrawal (IDCW) options on a monthly or quarterly basis, subject to availability of surplus.  It is important to note that dividends are distributed from the profits or gains made by the scheme and are in no way guaranteed every month. Though the fund house endeavors to give consistent dividends, the distributable surplus is determined by market movements and fund performance. 

There is another method to periodic withdrawals from the investment: using the Systematic Withdrawal Plan (SWP). Here, you need to specify a certain fixed amount required as a monthly payout/withdrawal. Then on a designated date, units amounting to that fixed amount would be redeemed. For example, an investor would invest Rs. 10 lacs and request that Rs. 10,000 be paid on the 1st of every month. Then, units worth Rs. 10,000 would be redeemed on the 1st of every month. 

It is important to note that the tax treatment for both, dividend and SWPs, vary, and investors need to plan accordingly. 

The common characteristics of a systematic withdrawal plan are: 

• Flexibility: You can choose the amount and frequency of withdrawals.
• Balance Growth: While you withdraw, the remaining funds stay invested, potentially earning returns.
• Tax Implications: The principal portion of the SWP withdrawal is not taxed, which can reduce the immediate tax burden compared to withdrawing everything at once.

The steps to set up SWP in your investment: 

Step 1: Choose the Right Fund - Select a mutual fund that matches your investment objectives and risk tolerance.

Step 2: Decide the Withdrawal Amount - Determine the fixed amount you require for your regular expenses. 

Step 3: Set the Frequency - Choose how frequently you want to withdraw (monthly, quarterly, etc.). 

Step 4: Start the SWP - begin the plan through your mutual fund distributor, financial advisor, or directly via the AMC’s portal under a Direct Plan for lower expense ratios. 

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Step 5: Monitor Your Investment - Periodically review the remaining corpus to ensure sustainability and make adjustments if required. 

There are certain elements you need to take into consideration before making this mode of investment and withdrawal plans: 

• Corpus Sustainability: Satisfy that the withdrawn amount is sustainable based on the size of your investment and the expected returns.
• Market Performance: Be aware that the value of your investment can change depending on the market conditions.
• Exit Loads and Charges: Check for the fees charged on the withdrawal in the SWP tenure.
• Inflation: Inflation can also erode the purchasing power of your withdrawal over time. 

The common application for the SWP in mutual fund: 

Equity funds are suitable for long-term growth, though they are volatile in the markets. 

Debt Funds are historically known to offer steady returns, however, it does not guarantee returns and are therefore ideal for conservative investors. 

You can drain your investment quickly and have little for future requirements. SWP, instead, has a fixed payout that periodically reduces the balance left to continue earning, thus making a sustainable financial plan. 

Disclaimer: Mutual fund investments are subject to market risks, read all scheme-related documents carefully.