Benefits of SWP

How can SWP be useful to investors?

Benefits of SWP

How Can SWP Be A Rewarding Strategy?


In our earlier article- Systematic Withdrawal Plan (SWP), we have seen what is SWP? How does it work? What are the key features of SWP? Now let us discuss, How can SWP be useful in various scenarios? Let us see the benefits of SWP in this article.

What is SWP?

Systematic Withdrawal Plan
Systematic Withdrawal Plan
  • SWP is a method where you are assured of getting a fixed amount at your pre-determined frequency. The problem with other regular money options like a monthly income plans, which pay dividends, is that the amount and the frequency of the pay-outs is not fixed.
  • Systematic Withdrawal Plan or SWP allows an investor to withdraw from his mutual fund scheme every month on an already set date. SWP is used to redeem your investment from a mutual fund scheme in a phased manner. SWP enables you to withdraw money in installments which is not possible in of a case lump sum withdrawals.
  • With SWP, we can customize the cash flow as per our requirement. We can choose to either withdraw just the capital gains on our investment or a fixed amount. This way we will not only have our money still invested in the scheme, but we will also be able to access regular income and returns.

benefits of swp

Benefits of Systematic Withdrawal Plan
Benefits of Systematic Withdrawal Plan
1. Disciplined Investing
  • An SWP automatically redeems some mutual fund units every months to meet your monthly expenses, regardless of market levels. It thus protects you from withdrawing large amounts due to panic/fear when there are market corrections.
  • It also withdraws money even when markets are making new highs and thus protects you from the impulse to invest more money/stay invested in boom periods.
2. Rupee-cost averaging
  • SWP is beneficial for the investors if it is designed for a longer period, as it let investors take the advantage of rupee cost averaging. Rupee cost averaging is an approach in which a person invest a fixed amount of money at regular intervals. This ensures that the investor buys more shares of an investment when prices are low and less when they are high.
  • Rupee-cost averaging gives an investor the average NAV of a mutual fund over several months/years rather than making him dependant on a NAV at a single point of time.
  • Thus, an investor benefits if he/she chooses to withdraw via SWP rather than withdrawing a lump-sum amount due to rupee-cost averaging. The phased withdrawal gives him monthly cash-flows and gives his money a longer period to grow.
3. fixed income
  • SWP is helpful for the investors who look for a fixed regular income. It can help them to get a steady income in their retirement years.
  • It is a good way to generate a second income as they don’t just protect the capital but they also guarantee gains.
4. tax efficiency
  • SWP is an extremely tax-efficient financial tool.When investors withdraw the money invested in mutual funds within a year, it attracts some amount of short-term capital gains. However when we withdraw the amount through SWP, it would not attract any tax.
  • Each withdrawal made through an SWP is considered to be a combination of capital and income. Tax is payable only on the income component and not the capital component. All the amount withdrawn in the first year would be the capital itself.

how SWP can be used effectively?

  1. Post-Retirement Income – SWP is one of the best ways to create a regular source of income post-retirement. Investments in debt funds, balanced funds etc can help gain more, apart from letting you withdraw at regular intervals.
  2. Better Use Of Surplus Funds – If you have lump-sum surplus fund, a SWP allows you to invest that amount in mutual fund schemes and withdraw that amount in as per your requirement, hence enabling a disciplined way of managing your savings.
  3. Best Substitute For Pension – Income from most of the pension plans is taxable, whereas if you invest in mutual funds and do a SWP, the amount you withdraw is tax-free. People can try creating a corpus 3-4 years before retirement and invest that later in an equity mutual fund to choose a SWP plan in order to save tax more efficiently.
  4. Capital Protection – Risk-averse individuals can invest in arbitrage mutual funds as returns on these funds are risk-free. Under arbitrage funds, dividends are totally tax-free. Investors can reinvest the dividend received from their investments made in arbitrage funds and do a separate SIP, which can later be used to do regular SWP.

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