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SWP in mutual fund or systematic withdrawal

SWP in mutual fund or systematic withdrawal plan is a facility offered by AMCs wherein investors, who have invested a lumpsum amount in any mutual fund scheme, can choose to withdraw a fixed amount at a given frequency. This turns out to be a smart option for investors to get regular income after retirement or otherwise.

When an investor has accumulated a substantial corpus during his working years, they can reap the benefits by way of systematic withdrawal plan. Depending on investors requirement, they can decide how much money they want to withdraw and at what frequency.

Benefits of SWP
It is flexible: In SWP in mutual fund, the investor has the flexibility to choose the amount, frequency and the date. The investor can also stop the systematic withdrawal plan at any point by writing to the AMC. The investor can also invest further lumpsum amounts in the scheme from where he/she is drawing the SWP.

Regular Income flow: As SWP in mutual fund facility provides the investors regular income from their MF investments, it becomes very convenient for those needing regular income to meet regular expenses.

Capital appreciation: There is a possibility of appreciation in the invested amount provided the systematic withdrawal plan withdrawal rate is lower than the fund’s return.

No TDS – unlike fixed deposits, there is no TDS for resident investors.
Tax efficiency – in equity oriented schemes, gains from SWP within 12 months from the investment date is taxed at 15% as short term gain and after 12 months it is treated as long term and tax-free upto Rs 1 Lakhs in a financial year and thereafter taxed at 10% only.

In non-Equity mutual funds, gains of systematic withdrawal plan within 36 months from the investment date is considered short term and added to investor’s income and taxed at the IT slab applicable to him/her. After 36 months it is treated as long term and taxed at 20% after allowing indexation.

In the same context, we can talk about yet another facility offered by mutual funds - systematic transfer plan – which facilitates transferring of investments from one scheme to another systematically, for avoiding the marketing-timing risk. Generally investors invest a lump sum amount in a low volatile debt fund like liquid/overnight or ultra short and systematically transfer a fixed amount or the appreciation to an equity or hybrid fund. In a systematic transfer plan units of the low volatile fund is redeemed at the applicable NAVs on the chosen STP date/s and redemption proceeds is used to buy units of the equity mutual fund at applicable NAV.

Benefits of STP
Reduces risk – Systematic transfer plan reduces the risk of investing lump sum amounts in aggressive funds in high market.

Probability of higher returns: Money invested in low volatile funds like liquid, ultra short or overnight funds has the potential to yield returns better return than savings bank account till such time it is transferred to aggressive funds like equity or hybrid.

Rupee Cost Averaging: Systematic transfer plan works to your advantage in highly volatile markets through rupee cost averaging of the purchase price of the target scheme as you buy more units when the markets are low and less units when the market is high.

In conclusion, mutual funds offer systematic withdrawal plan and Systematic transfer plan facilities to its investors. In the former, one withdraws a fixed amount at a fixed interval whereas in the latter, one transfers a certain amount from one fund to other for benefit of rupee cost averaging of their investments.