Sharekhan Blog

What is SWP (Systematic Withdrawal Plan) in Mutual Funds?

  • Apr 18, 2024

Everybody has varying requirements when it comes to money. Each investor, therefore, has a different investment strategy. While some investors favour making one large investment, others prefer to make little ones over time using a systematic investment plan (SIP). Certain investors aim for consistent returns on their assets, while others pursue capital growth.

Fund houses provide a variety of tools and facilities to cater to the needs of various kinds of investors. A Systematic Withdrawal Plan is one such facility (SWP). So, let’s explore all about meaning of SWP in mutual fund or mutual fund STP meaning in detail:-

What is the SWP or Systematic Withdrawal Plan?

The term Systematic Withdrawal Plan is SWP. Mutual funds provide an investing option that lets users take out a certain amount of money on a regular basis from their assets. Depending on the investor's option, withdrawals may occur monthly, quarterly, or annually. The reverse systematic investment plan, or SWP, allows you to withdraw a predetermined amount rather than investing a specific amount at regular periods.

How Does SWP Work?

You can select between dividend and growth plans when investing in mutual funds. When investing in a growth plan, your profits are reinvested, raising the fund's value. Conversely, a dividend plan distributes profits as dividends to investors. SWP in mutual funds is compatible with growth plans, but it can also be utilized with both of them.

Let's look at an example of how SWP functions. Assume that a mutual fund you put Rs. 5 lakhs in has grown in value to Rs. 7 lakhs in five years. You now wish to take out a fixed monthly payment of Rs. 10,000 from your investment as additional income. When you invest in SWP, the mutual fund operator will automatically sell units worth Rs. 10,000 each month and credit your bank account with the proceeds.

Benefits of the Systematic Withdrawal Plan

1.Regular Income

The main advantage of choosing SWP is that it gives investors a consistent income stream without requiring them to liquidate their whole investment. For those seeking additional income during retirement or for other financial purposes, this makes it a great choice.

2. Systematic Withdrawal

The systematic withdrawal principle, which allows investors to take out a certain amount on a regular basis, is the foundation of how SWP operates. This aids in preventing snap judgments that could damage an investor's portfolio.

3. Tax Benefits

With SWP, the full amount withdrawn is not taxed; just the investment gains are. If you invest in debt funds for longer than three years, you can also benefit from tax advantages like indexation.

4. Flexibility

Investors can select the frequency and amount of withdrawals based on their own financial needs, thanks to SWP's flexibility. Additionally, you can halt or delay withdrawals as needed.

Who Should Opt for SWP?

  • Senior citizens availing a steady source of income.
  • Investors with excess capital who desire to generate returns while taking regular withdrawals.
  • Individuals who choose systematic withdrawals over lump sum withdrawals in order to reduce the effect of market changes on their withdrawals.
  • Those with financial objectives such as a child's education, marriage, or home ownership might choose to have SWP in mutual funds progressively deduct the necessary amount.
  • Investors who want to lessen their reliance on a single source of income by diversifying their revenue streams.

Effective Uses of a SWP

Here are some of the uses of SWP: -

1.Establishing a consistent secondary income stream

To keep up with the escalating expense of living in the modern world, one needs an extra source of income. One excellent strategy to establish a consistent secondary income stream is by investing in mutual funds and taking withdrawals through a savings and loan plan.

2. Protect your capital

You can start investing in arbitrage mutual fund schemes if you are very cautious about accepting any financial risks. These programs provide guaranteed returns with almost no risk. If you select the dividend option, you can use a SIP to invest the dividend in a debt plan. Eventually, you won't need to risk your capital to launch the best SWp mutual fund and get consistent revenue.

3. Build your pension

Whether or not you are enrolled in a pension plan, you can create a corpus approximately five years before retirement and invest it in a mutual fund scheme entirely based on your level of risk tolerance. You can establish your pension once you retire by launching an SWP.

The Bottom Line

With mutual funds, investors can conveniently withdraw their money while still earning profits because of SWP. For people looking for a consistent source of income or to augment their retirement savings, this is a viable choice. However, it is crucial to take into account aspects like investment horizon, fund performance, and tax ramifications before choosing SWP.

Team Sharekhan
by Team Sharekhan

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