Most investors are familiar with a Systematic Investment Plan (SIP) – the process of accumulating money through regular investments into a mutual fund. But many may not be aware of SWP or Systematic Withdrawal Plan.
An SWP is simply the reverse of Systematic Investment Plan (SIP). It is a facility of withdrawing fixed amount, regularly, from a lump sum invested in a mutual fund. The investor can set the frequency of withdrawal as monthly, quarterly, half-yearly, or annually.
Why Do People Opt for Mutual Fund SWP?
Most people opt for Mutual Fund SWP to get the unique benefits it offers. Below are the advantages of SWP:
Regular Income: Mutual fund SWPs offer the assurance of fixed amount at a predetermined time frequency. SWP is a boon and very effective income source during the retirement phase.
Tax Efficiency: Mutual fund SWPs are tax efficient. No tax can be deducted on the withdrawals. Moreover, the actual tax liability is less than the interests earned from fixed deposits. The long-term capital gains from equity mutual funds are exempt in case of holding it for more than a year.
Inflation Protection: The returns from Mutual Fund SWP are good at beating inflation, especially if they are invested through equity fund route.
Things to Know:
- One cannot open an SWP on a scheme in which there is an ongoing SIP.
- Fluctuations in returns may affect one’s investment as well as SWP.
- Since SWP can affect principal in a falling market, some financial planners recommend SWP in balanced funds, which are less volatile compared to pure equity funds.
So, it is important to be mindful when planning. It is to be noted that the exit load of the fund may apply even to the SWP. If you seek more professional advice on finance and investments from experts, approach ArthaYantra – World’s only full-service Robo-Advisor.