Systematic Withdrawal Plan (SWP) in Mutual Fund

25 June, 2019

Mutual fund investors are opting for Systematic Withdrawal Plans to meet monthly cash flows and this is emerging as a preferred mode as compared to dividend.

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1. What is a Systematic Withdrawal Plan (SWP)?

Systematic Withdrawal Plan (SWP) is a facility by which investors can withdraw a fixed amount from a mutual fund scheme. The frequency of withdrawal could be monthly or quarterly, though the monthly option is most popular. Investors can customise cash flows – they can withdraw just a fixed amount or even opt to withdraw just the capital gains on his investments.

2. How can an investor start one?

A SWP can be started any time. It can be done while making the first investment. If you are an investor in a scheme, you can just activate the SWP option in the scheme, whenever you feel the need for regular cash flows. To activate it, you need to simply fill out an instruction slip with the AMC stating the folio number, the withdrawal frequency, the date for the first withdrawal and the bank account to credit the proceeds.

3. Why is SWP finding favour with financial advisors now?

Dividend is subject to a dividend distribution tax, while capital gains up to Rs. 1 Lakh in a financial year, are tax free in the hands of an investor. In addition, dividend cannot be guaranteed by a mutual fund and is subject to market movement, distributable surplus and profits made by a scheme. As compared to this, SWP is more reliable than a dividend and is set up by the investor himself.

4. What are the tax implications in a SWP?

SWP is periodic withdrawal, which translates into redemption of units from the scheme. Hence, the tax treatment of each withdrawal will be the same as is applicable to equity and debt funds. Hence, for units where the period of holding has not crossed 12 months for equity-oriented funds, investors will have to pay a short term capital gains tax.

For debt funds, there will be a tax liability (short-term capital gains on holding for less than 36 months and long-term capital gains on longer holding periods). In addition, investors also need to factor in the exit load of the scheme. If it is from an equity fund which has a 1 % exit load before the end of one year, the investor will have to bear the same.


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Also read: 7 reasons why you should Invest in Mutual Funds

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