Understanding the Systematic Withdrawal Plan

Published On: May 14, 2021Last Updated: Oct 14, 20236 min read

“If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.”- Warren Buffet

To achieve financial goals it is very important to turn your income into wealth. Many people are not aware of the difference between Income and Wealth. Wealth refers to the assets held by a person at a given point of time.

We can use wealth to generate regular income. Here the question is how and what amount of wealth is required. A Systematic Withdrawal Plan can allow you to withdraw from the amount you have invested. This amount can be fixed, variable and can be withdrawn on monthly, quarterly, semi-annually or annually basis.

What is Systematic Withdrawal Plan (SWP)

Systematic Withdrawal Plan works exactly opposite to the Systematic Investment Plan. Unlike, other mutual funds, you can withdraw money in instalments rather than lump sum withdrawals. Hence, you can not only have your money parked in as investment but can also have regular income. You have an option to reinvest the withdrawn money in some other mutual funds or can have the money all by yourself.

Also Read: Understanding the Income Tax Rules for Equity Shares Trading

How is SWP different than SIP

Under Systematic Investment Plan, you park your bank account savings into mutual fund scheme, whereas under SWP you withdraw from your investments and get them deposited in your bank account. This helps you keep your hard earned money safe against the market fluctuations.

How does SWP work

This can be explained much better with the help of an example. Suppose, Mr. Ray purchased 1000 units of a mutual fund scheme in January 2021 and needs to withdraw Rs.10,000 every month. With the help of SWP, this can be done as:

MonthCashflowNAV (Net Asset Value)No. of Units redeemedFund UnitsInvestment Value

Here, you can see that Mr.Ray had an initial investment of Rs.100,000 from which he already withdrew Rs.30,000. Hence, there is a gain of Rs.70 till now. In case if the NAV goes down, the number of units that shall redeem would increase.

Now, when you want to earn a monthly income from your investment equivalent to your salary, you need to make an investment based on the average rate of return of the Mutual Fund Scheme.

For instance, say your monthly salary is Rs.40,000. Hence, you need to get Rs.480,000 annually. Suppose the average return of a mutual fund scheme is 9.53%, you need to invest Rs.50,36,800 currently to get Rs.40,000 every month.

Let us consider, getting a fixed income of Rs.40,000 monthly or Rs.480,000 annually by investing in Large Cap Mutual Fund Schemes under SWP:

Mutual Fund Scheme Monthly Income Average Return over last 10 years Amount to be invested
 UTI Nifty Index Fund                                40,00010%                        48,00,000
 Axis Bluechip Fund                                40,00013%                        36,92,308
 ICICI Pru Bluechip Fund                                40,00012%                        40,00,000

Thus, you need to invest somewhere in between 37 lacs- 48 lacs to get a monthly income of Rs.40,000.

Benefits of SWP

Having known about how SWP works, let us know about the benefits of the Systematic Withdrawal Plan:

  1. Fixed Income: An SWP Investor can get a steady income once he invests a lump-sum amount. This can help one to plan his retirement and expenses of children more efficiently.
  2. Tax Benefits:  Every Amount withdrawn is considered as a combination of Capital and Income. The liability to pay tax shall arise only on income component. In case of Debt funds, if the funds are held for a period of less than 36 months then the same shall be considered as a part of your income and it shall be taxed at the applicable income slab rate. In case if the funds are held for more than 36 months, Long Term Capital gain shall be taxed @20% with the benefit of indexation.
  • Uniform or Disciplined Investing:  Every month few units are redeemed from which you can meet your monthly expenses irrespective of market situations. This helps you prevent from withdrawing more out of fear or panic when the market is bearish. The amount is withdrawn every month hence, it prevents you to overcome the greed to invest more when the market is bullish.

How is SWP beneficial to all kind of Investors

Different kinds of Investors have different needs. Here is how there is something for every investor investing under the SWP:

Retirement Plans: All the persons retiring shall have a fixed source of income with the help of SWP in Mutual Funds

Side-Hustle:  In these times, it is very important for salaried individuals to have a second source of Income to make the two ends meet and live a luxurious life. With the help of SWP financial goals such as Children’s education, purchase of consumer goods and others can be met effectively.

Supplement to Freelancing Income: The common issue amongst the freelancers is not having fixed or steady income. There would be times where they would be minting money whereas in rest of the time there would be very less income generation. With the help of SWP, freelancers can have a stable income generation.

Safe Escape for those having less risk appetite: Smart Investors invest in Mutual Funds when the market is doing well. Once they achieve their target of desired corpus, they shift to SWP and start investing in less volatile investment options such as Bank Fixed Deposit, Post Office Deposits etc.    

Also Read: Quick Guide for Income Tax Return Filing

Tips for using SWP efficiently

  1. Do not go behind the highest returns: Invest based on the duration you want to park your funds for and not based on the returns.
  2. Consider your Financial Responsibilities: Do not park your funds under SWB just because everyone is doing. Park the excess funds only under SWB so that you do not face cash crunch.
  3. Timely Review: Review your investments frequently such as montly or bi-monthly.

Closing Thoughts

With the help of Systematic Withdrawal Plan, a sense of Financial Discipline can be cultivated. You can easily use it to fund your monthly expense and also plan for your or your parents’ retirement. To gain more benefits out of it, you should withdraw only the interest part and keep the capital amount intact.

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Shreeda Shah
About the Author

Shreeda Shah

Shreeda Shah is a Chartered Accountant associated with Legalwiz.in as a Business Advisor. She has a good expertise over Direct Taxation and Indirect Taxation compliances.