Investing in mutual funds is one of the best ways to grow your wealth with good returns over time. Most of us know about SIP in mutual funds, in which we invest a fixed amount on a fixed date in mutual funds, but most of the people do not know about SWP. SWP is a useful tool for those who want a regular income from their investments. Through the article we will discuss about the concept of SWP, how it works and its benefits for the investor.
Systematic Withdrawal Plan
This is a facility offered by mutual funds through which we can get a regular income from our investments. This income comes in the form of regular redemption’s from your investments. This redemption can be monthly, quarterly, half yearly or yearly, the frequency of which the investor can choose as per his convenience. You can consider this as the complete opposite of SIP. Just as in SIP you invest a fixed amount in a mutual fund every month, similarly in SWP you can withdraw a fixed amount from your mutual fund investment. This facility is very beneficial for those people who do not have any other source of income after a certain age or who need another source of passive income to support their main income.
How many types of SWP are there?
SWP are mainly of two types:
Fixed Amount SWP and Capital Appreciation SWP
In Fixed Amount SWP, a fixed amount determined by the investor is credited to his account every month, which he can increase or decrease as per his need.
In Capital Appreciation SWP, only the profits made on your investment are redeemed. For example, if after one year your invested amount becomes Rs 10 lakh 1100,000, then only Rs 100,000 is used to give SWP.
How SWP works?
Any person who has invested in any mutual fund scheme can easily avail the benefit of SWP facility. The entire process of SWP works as follows:
First of all the investor has to choose the scheme in which he wants to invest. This investment can usually be done in open ended schemes through SIP or lump sum. After this, to start the SWP facility, you can give instructions to the AMC through online or offline mode in which you decide how much amount you want to withdraw and at what frequency. After all these things are setup, the SWP installment starts getting credited to your bank account on the next given date and as long as your money remains invested as a balance in the mutual fund, it increases due to market linked returns. Let us understand this entire process through an example.
Suppose you have invested Rs 10 lakh in an equity or balance mutual fund scheme.
The NAV price at the time you invested was Rs 100. That means you were allotted a total of 1000,000/100 = 10,000 units.
To somehow avoid the exit load, you started SWP of Rs 10,000 every month from this investment after one year. Suppose when your first SWP installment was credited, the NAV of the scheme was Rs 103. Therefore, to pay Rs 10,000, AMC had to redeem 10,000/103 = 97.08 units.
When the time for next installment came, the scheme NAV was 105 i.e. total units redeemed by AMC was 95.23. This process continues until the investment value is exhausted or till the date fixed by the investor.
In the above example, you must have noticed that at the time of purchasing the unit, the NAV was low and when SWP was started, it became higher due to the returns received in the mutual fund. If we use the SWP calculator, we can know how much profit we are likely to get on the investment from the average return on investment even if we are taking regular redemption’s on it. In the example, at the time of second SWP installment, the NAV of the scheme was Rs 105 i.e. the total value of the fund was Rs 10,000*105 = Rs 10,50000 of which you had already redeemed Rs 20,000 through SWP. Even after redemption, your fund value is still more than the invested value and this is where the real benefit of SWP lies. However, it is important to keep in mind that there is no guarantee of positive returns in mutual funds. In adverse market conditions, your money may decrease instead of increasing, therefore, while choosing an investment scheme, analyze the market situation and also keep in mind that apart from the past performance of the scheme being good, there is consistency in its average returns. Must have been.
Benefits of SWP
Regular Income: Through SWP you can get regular income from your investments. This is very beneficial for those who are in their retirement age or want another source of passive income along with their main income.
Flexible: SWP gives you the option to choose your income amount and its frequency. SWP does not have any fixed time period and the investor has the option to close it whenever he wants.
Equity Linked Returns: You can withdraw your money regularly through SWP but you will still get good returns on the remaining money since it is an equity linked scheme. This return works to further increase your investment value so that even with regular withdrawals, your fund value remains more than the investment value.
Taxation on SWP
In SWP, your money is redeemed from the mutual fund scheme and credited to your bank account. Any profit made on the redeemed money comes under the category of capital gain. That is, if the NAV of the scheme at the time the units are redeemed for SWP is more than the NAV at the time of your purchase, then it will be treated as capital gain on which tax is applicable as per the slab of long term or short term capital gain. Is.
In equity and equity oriented hybrid mutual funds, if you redeem money before 12 months or one year, then 15% capital gains tax is levied on it, whereas on investment for more than 1 year, 10% capital gains tax is applicable up to Rs. 1 lakh. Is free.
In debt and debt oriented mutual funds, short term capital gain is applicable before 36 months and long term capital gain is applicable after 36 months. Income before 36 months is taxable as per the investor’s tax slab and after 36 months, if the investor wants to avail the benefit of indexation, then it comes under 20% tax. If he does not take the benefit of indexation, then this is also taxable as per his income slab.
Conclusion
We have many means for our retirement planning and to get passive income, among which SWP is also one. If we choose SWP, we get many benefits including regular income, market linked returns, tax savings and flexibility. However, before choosing this option, it is very important to check the market conditions and our investment portfolio.
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