How will it be if you start getting a regular income from your Mutual Fund investment? SWP is a way to get this regular income. You will continue to receive income through SWP at a regular interval. If you are also doing SIP then you must also know about SWP.
Today we will understand SWP in detail and through this post we will understand What is SWP, how to enable it and every aspects related to SWP.
The full form of SWP is Systematic Withdrawal Plan. SWP is a redemption scheme (mode of fund withdrawal). Just like in SIP, you make some investment every month, in SWP, a certain amount from your investment is transferred back to the bank account. You receive a fixed amount in SWP every month or at whatever time you choose. The number of units required for this amount will be sold by the mutual fund house.
What is SWP in Mutual Fund?
SWP is a facility in Mutual Funds through which investors can withdraw some amount in a given time interval. This time interval can be weekly, monthly, quarterly, half-yearly or yearly. The investor himself decides how much amount to withdraw. In this, investors have the option to either withdraw a fixed amount or to withdraw the capital gains on their investments.
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How does SWP work?
With the help of this example, you will be able to understand SWP in Mutual Funds in easy language.
Suppose Rajesh deposited a SIP of Rs 5000 every month in HDFC Sensex Plan in the year 2000. In 2020, Rajesh’s portfolio was valued at Rs 1 crore. Now here Rajesh has two options.
First, he could withdraw all the money and transfer it to his bank account or invest that money somewhere. In the second option, he can take SWP plan on his mutual fund portfolio.
Suppose that the value of his portfolio is Rs 1 crore and accordingly Rajesh has a total of 20,000 units in his portfolio. He started the SWP scheme of Rs 50,000.
You can understand its calculation from the table below-
|Date||SWP Amount||Current NAV (Assuming)||Units to be sold (round off)||Balance unit||Current value of portfolio|
|01 Jan 2021||Rs 50,000||505||50000/505 = 99 units||19,901||Rs 1,00,50,005|
|01 February 2021||Rs 50,000||527||50000/527 = 95 units||19,806||Rs 1,04,37,762|
|01 March 2021||Rs 50,000||570||50000/570 = 87 units||19,719||Rs 1,12,39,830|
|01 April 2021||Rs 50,000||480||50000/480 = 104 units||19,615||Rs 94,15,200|
|01 May 2021||Rs 50,000||440||50000/440 = 114 units||19,501||Rs 85,80,440|
|01 June 2021||Rs 50,000||475||50000/475 = 105 units||19,396||Rs 92,13,100|
If you look carefully from the above table, you will come to know that when the NAV of the mutual fund is high, there is a need to sell some units. In this situation, you will have more units left in your portfolio even after selling.
But in case of falling NAV, you will have to sell more units to the fund house to get your withdrawal amount. As a result, the units in your portfolio tend to run out quickly.
High or low NAV can have an impact on Equity Mutual Funds but there is no such problem in Debts Funds. Because the market volatility does not have much effect in Debts Funds.
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Types of SWP
SWP can be activated in two ways.
1. Fixed Periodical Withdrawal
In this option there is an option to withdraw a certain amount at a predetermined time. Like Rs 20,000 per month. This amount is paid by the mutual fund house to you by selling your units at the current NAV.
2. Appreciation Withdrawal
In this option, whatever return you are getting on your investment, it is transferred to your bank account. Suppose you have Rs 10 lakh deposited in your investment portfolio. Your portfolio gave a return of Rs 20,000 in a month. In this case Rs 20,000 will be transferred to your bank account in monthly SWP. If the next month returns are Rs 10,000 then you will get Rs 10,000.
But one of the disadvantages of appreciation withdrawal is that there can be negative returns in the portfolio at times. Due to which you are not able to get any money in that month which does not match the purpose of getting your SWP done. Especially when you have taken SWP plan in your retirement age.
How much tax is applicable on SWP?
Tax is payable on redemption made through SWP.
Debt Fund- The units of Debt Fund sold 3 years ago will be taxed as per your income tax slab. That means, its profit will be taxable by adding to your income. Investments sold after 3 years impose LTCG Tax (Long Term Capital Gains) which is 20%.
Equity Fund- In case of equity funds, STCG (Short Term Capital Gains) tax is levied at the rate of 15% on investments sold within 1 year. LTCG is imposed at the rate of 15% if the holding period is more than 1 year. Here, no matter what your other income is, you have to pay this tax.
How to start SWP?
You have two options to start in Mutual Fund SWP Plan. In the first option, you can apply for SWP online by visiting the fund house’s official website. The online method is much easier than the offline method, in this you are saved from paperwork. In this you have to choose payout amount and payout frequency.
If you are not able to apply for SWP online then you can fill the form of SWP and submit it to the nearest office of the fund house. Some of the big mutual fund houses and SWP forms are given in the links below. You can see all the information provided in it.
What are the differences between SWP and SIP?
SWP and SIP are completely opposite to each other.
- In SIP you deposit money every month whereas in SWP you get money in your bank account.
- On doing SIP, units are added to your portfolio but in SWP the units are less than your portfolio.
Is there a charge for getting SWP done?
There is no fee or charge for starting the SWP scheme.
What are the withdrawal options in SWP?
You can choose to withdraw through SWP weekly, monthly, quarterly, half yearly or yearly as you like. It will have to be confirmed with your fund house that at what time they provide the facility.
Can I make changes in the SWP plan?
You can get your SWP scheme closed whenever you want, as well as change its withdrawal timing.
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Benefits of SWP
- SWP Scheme is a great option for those investors who have accumulated a good amount of funds in their portfolio. At the age of retirement, it can become a good source of your regular income.
- You can choose the amount in SWP according to your need and time. That means, in this you can take advantage of redemption according to your need.
- For regular income, SWP plans can be beneficial as compared to mutual fund dividend plans.
Precautions for SWP
If a plan has advantages, then it may also have some disadvantages. For which you need to take some precautions.
- Running SWP from Equity Mutual Fund can quickly empty the investor’s portfolio due to the volatility of the market. SWP is the best option for Debt Funds.
- By the way, you can also get SWP done in a small portfolio but you will get less amount in it that too for a short period of time. If you have accumulated a large entity in your portfolio, then SWP can be the best redemption plan for you.
- The terms and conditions of all fund houses may be different for SWP, such as minimum amount required for SWP, minimum time period of SWP etc. It is better that you read all the terms and conditions related to that scheme before getting any SWP scheme done. So that you do not have to face the problem later.
You must have understood that SWP is a scheme brought under redemption planning. SWP is the best option to systematically withdraw a mutual fund once you have a large portfolio.