SWP in Mutual Funds: A Smart Investment Move

Investing in mutual funds has become an increasingly popular choice for individuals seeking to grow their wealth and secure their financial future. Most investors are familiar with the traditional route of investing in mutual funds through lump-sum investments or systematic investment plans (SIPs).

However, another strategy often goes under the radar but can be a smart investment move - Systematic Withdrawal Plans (SWP). Through the Systematic Withdrawal Plan (SWP) option in mutual funds, investors can efficiently receive a monthly income stream while benefiting from their invested capital's potential growth.

In this article, we will delve into what SWP in mutual funds are, how it works, benefits and best SWP mutual funds.

What is SWP in mutual funds?

A Systematic Withdrawal Plan (SWP) in mutual funds is a smart financial tool designed to provide investors with a regular source of income. SWP allows investors to withdraw a predetermined amount from their mutual fund investments at regular intervals, typically monthly, quarterly, or annually. The primary objective of a SWP is to help investors meet their liquidity needs and create a reliable income stream from their mutual fund investments.

How does SWP in mutual fund works?

To better understand how SWP works, let's consider an example.

Suppose you invest Rs 1,00,000 in a mutual fund scheme. This buys you 10,000 units at the current Net Asset Value (NAV) of Rs 10 per unit. You set up an SWP to withdraw Rs 6,000 monthly from this investment.

On 1st February, the NAV is still Rs 10. To withdraw your Rs 6,000, the fund will redeem 600 units (Rs 6,000/Rs 10). Now, you are left with 9,400 units. On 1st March, let's say the NAV has increased to Rs 20 per unit. To withdraw Rs 6,000 now, the fund will sell only 300 units (Rs 6,000/Rs 20). So, now, your remaining units are 9,100.

This process continues for the duration of your SWP plan until all your mutual fund units are depleted. The remaining units stay invested to benefit from any potential appreciation in the fund's value.

This is how SWP in mutual funds operates, allowing you to withdraw a fixed sum regularly while keeping the corpus invested to grow further.

How to withdraw SWP in mutual funds?

The two main methods for systematic withdrawal plans (SWP) from mutual funds are fixed withdrawal plans and appreciation withdrawal plans. Fixed plans allow you to set a consistent withdrawal amount at regular intervals like monthly or annually. 

Appreciation plans, on the other hand, base withdrawals on the appreciated amount within the investment. You can opt to receive these gains on a monthly or quarterly basis while keeping the principal amount untouched. This method is ideal for those looking to enjoy income from investment growth while preserving their initial investment.

Why is SWP in mutual funds a smart investment?

Here are five reasons why SWP in mutual funds are a smart investment.

#1. Provides regular income without liquidating the investment

SWP allows regular income withdrawal while keeping the bulk of the mutual fund investment intact.

For example, if an investor invests Rs 10 lakhs in a mutual fund, they can withdraw Rs 15,000 monthly through SWP over 5 years. This would generate Rs 15,000 monthly income without having to redeem the entire Rs 10 lakh investment at once. Only the withdrawn portion gets liquidated while the main corpus remains invested and can keep appreciating.

This way, SWP enables income generation while capitalising on underlying mutual fund growth.

#2. Takes advantage of market appreciation

SWPs allow investors to take advantage of market-linked returns on the invested portion of the corpus. When NAVs rise due to underlying market growth, the funded balance also increases in value.

For example, if the NAV grows from Rs 20 to Rs 30, the remaining invested amount would be appreciated accordingly. This helps offset the impact of the withdrawals to some extent, allowing the overall capital to grow.

Essentially, SWPs enable investors to earn higher returns through market appreciation while drawing a fixed income.

#3. Flexibility in amount and frequency

Investors can opt for monthly, quarterly or annual SWPs as required. The withdrawal amount can be chosen based on income needs while considering the risk profile. Many Asset Management Companies also allow investors to increase/decrease the SWP amount within defined limits.

This allows aligning the SWP payouts better with changing income requirements.

#4. Greater convenience

Once the SWP is set up, the withdrawals happen automatically on the specified dates without manual intervention. The SWP amount just gets credited automatically to the linked bank account. This makes the process very smooth and hassle-free for the investor.

#5. Tax efficiency

SWP gains are categorised as short-term or long-term capital gains, depending on the investment duration.

Equity funds:

- Investments held over a year are treated as long-term capital gains, taxed at 10% on profits exceeding Rs 1 lakh.

- If held for less than a year, a 15% short-term capital gains tax is applicable.

Debt funds:

- Withdrawals within three years are taxed at the investor's applicable slab rate.

- Withdrawals after three years incur a 20% tax rate with indexation.

Top 5 SWP mutual funds

When considering SWP in mutual funds, selecting the right funds that align with your financial goals and risk tolerance is crucial. Here are the best systematic withdrawal plan mutual funds.

#1. ICICI Prudential Multicap Fund - Growth

#2. SBI Equity Hybrid Regular Growth Plan

#3. HDFC Retirement Savings Fund Equity Plan

#4. Quant Absolute Fund Growth Plan

#5. Tata Retirement Savings Progressive Fund Direct Plan-Growth

Final thoughts

SWP in mutual funds offers a smart investment move for individuals looking to generate a consistent source of income while keeping their capital invested. The flexibility, convenience, and potential for capital appreciation make SWP an attractive choice for a range of financial goals, from retirement planning to funding education or other long-term financial needs.

If you're ready to start with your mutual fund investment journey, turn to Tata Capital Moneyfy. We offer a range of top mutual fund options and provide expert guidance to make the most of your investment choices. Visit the Tata Capital Moneyfy website to know more or download the Moneyfy's mutual fund App.