We all dream of a future where we can enjoy our lives stress-free without the constant worry of running out of funds. This is precisely where the Systematic Withdrawal Plan (SWP) in mutual funds comes into the picture. SWP functions as a personal financial resource, ensuring a consistent flow of funds into one's bank account at regular intervals.
What is an SWP?
A systematic withdrawal plan or SWP is a facility extended to investors allowing them to withdraw a fixed amount of money from a mutual fund at regular intervals. You can choose the amount and frequency of your withdrawal. You also get the option to just withdraw the gains and keep the capital invested. At the set date, the units from your portfolio are sold and the funds get transferred to your account.
Key Benefits of SWP
Now that we have understood the meaning of SWP, let’s shed some light on the key benefits to investors:
Regular income stream
A predictable income source is facilitated by SWP, enabling investors to acquire a set sum at frequent intervals. This valuable characteristic proves especially advantageous for retired individuals dependent on investment returns as their primary means of supporting daily costs. Through the implementation of SWP, investors can secure a reliable payment flow that guarantees financial security in meeting continuous monetary requirements.
Capital appreciation
As investors receive regular withdrawals from their mutual fund, the untouched portion of their investment has the opportunity to appreciate through market fluctuations. By maintaining exposure to growth potential while still accessing income, this combination can ultimately lead to an increase in overall portfolio assets.
Tax efficiency
SWP provides tax benefits as compared to other means of regular income. When investors opt for SWP, they only pay capital gains tax on the money they withdraw, not on the entire amount they invested. This may lead to a decreased burden of taxes for investors, enabling them to enhance their capability in terms of being accountable for taxes while keeping more profits from investments.
Flexibility and customization
SWP offers investors the ability to customize and adjust their withdrawal amounts or frequency as per their changing financial requirements, adding a great deal of flexibility. Investors can alter the amount of withdrawal by either increasing it or decreasing it, changing how frequently they withdraw earnings from investments. Not just that but there is an option to even pause such withdrawals temporarily if required.
This level of customization empowers investors to align their income demands with long-term financial targets and adapt accordingly while devising a sound strategy for withdrawing funds intelligently at different intervals in time.
How Does Systematic Withdrawal Plan Work Online?
The emergence of online platforms has made investing in mutual funds and handling SWP a remarkably hassle-free affair. These user-friendly interfaces enable investors to effortlessly set up and monitor their SWPs, providing them with an effortless experience. Here's a comprehensive outline of how one can execute an SWP using these online facilities:
Step 1: Selecting the Mutual Fund:
A plethora of mutual fund options are easily accessible to investors through online platforms. They can browse through various categories, ranging from equity and debt funds to hybrid or sector-specific alternatives that cater precisely to their investment objectives, risk profile, and expected time frame.
Investors can make well-informed decisions as the platforms offer comprehensive data on every mutual fund, such as historical performance, portfolio compositions and expense ratios, and risk ratings.
Step 2: Setting up SWP:
After selecting an appropriate mutual fund, the investor can establish the SWP via online means. The platform will lead investors through each stage systematically and enable them to specify withdrawal frequency, amount, and duration by their financial needs. A range of options is also available for withdrawal frequencies including monthly, quarterly semi-annually or annually so that investors may choose as per preference.
Furthermore, the online platform offers investors various tools and swp calculators to help them predict how their SWP choices could impact their investment portfolios. This enables investors to establish a consistent flow of funds by selecting an appropriate withdrawal amount according to their income needs
Step 3: Availing Regular Withdrawals:
Once the SWP is established, investors may commence receiving regular withdrawal payments based on their preferred intervals. The prearranged sum for withdrawals will be deposited into the investor's designated bank account on specified dates through an automated process.
By automating the entire process, online platforms ensure a seamless and stress-free experience. This eliminates the need for investors to manually initiate each withdrawal as transactions are automatically executed by the system, providing peace of mind and convenience.
Here’s an example to understand the benefits & functioning of SWP better!
Suppose an investor has an investment of Rs. 100,000 in a mutual fund and sets up a monthly SWP of Rs. 1,000. Assuming an average annual return of 8%, the individual can receive a steady income while also capitalizing on appreciation over time. After ten years have passed, the said investor would have collected withdrawals worth around Rs.120,000 while their remaining investment grows to approximately Rs.168,000.
Is there a minimum investment required for SWP?
Yes, mutual funds typically have a minimum investment threshold for SWP, which varies depending on the fund house and the scheme chosen by the investor. Investors should check the scheme's offer document or consult with their financial advisor to determine the minimum investment required.
Are there any tax implications of SWP?
Yes, there are tax implications associated with SWP. Any gains made from the redemption of mutual fund units through SWP are subject to capital gains tax. The tax rate depends on the holding period of the units and the type of mutual fund.
Can investors change the withdrawal amount or frequency in an SWP?
Yes, investors can modify the withdrawal amount or frequency in an SWP based on their financial needs or circumstances. They can submit a request to the mutual fund company to make changes to their SWP instructions.