Where an investor has invested in a mutual fund (MF) scheme, he/ she can choose to withdraw a fixed sum of money, at regular intervals, for a fixed period or till the entire holdings are redeemed, using the Systematic Withdrawal Plan (SWP) route.
When an SWP is set up against a particular MF scheme, the respective AMC redeems units at specified, regular intervals, as prescribed by the plan. The number of units redeemed will depend on two variables — NAV of the scheme as on the date of redemption and the SWP amount.
For example, you invest a lump-sum of ₹10 lakh in an MF scheme. Assuming the NAV at the time of purchase is ₹10, you will be allotted one lakh units. Two years later, you plan for an SWP and wish to withdraw ₹20,000 on the first of every month. As at the first month of SWP, let us assume that the NAV is at ₹12.5. Now, the AMC redeems 1,594.4 units (SWP amount of ₹20,000 divided by ₹12.5, NAV as on date of redemption). Assuming the NAV is at ₹12.7 for the second month of SWP, AMC redeems 1,578.6 units. This process continues every month till the end of the SWP period chosen by the investor.
Setting up SWP
If you are tech-savvy, log in to your demat account and choose the MF scheme from your portfolio, on which you plan to set up the SWP. Specify the amount to be withdrawn, number of withdrawals, frequency of withdrawals and the date on which it is to be withdrawn in the respective boxes and confirm the same. The same will have to be two-factor authenticated using CDSL t-pin to place the request.
On the offline route, investors have to submit an application/ form in this regard to the respective fund house/ distributor/ MF registrar.
While an SWP can be stopped anytime in the online route, an application/ form has to be filed for the same in the offline route. It normally takes between 7 and 21 days, in both cases, to process a request for an SWP or cancel it.
Tax efficiency
SWP is also a tax-efficient route to liquidate your MF investments. However, capital gains tax is attracted where the NAV on redemption exceeds the NAV on purchase. And based on the type of MF scheme and tenure for which the investments are held, the gains are classified as long-term or short-term capital gains.
Where you have held equity-oriented funds for more than a year, the redemption falls under the long-term bucket, and you get an exemption up to ₹1.25 lakh, beyond which the gains will be taxed at 12.5 per cent. Where the period of holding is less than a year, it is tagged as a short-term gain and taxed at 20 per cent.
Debt-oriented funds, on the other hand, are always taxed at marginal rates, while gold funds are taxed at slab rates if held for less than two years, while they are taxed at 12.5 per cent if held for more than two years.
Why SWP
SWP, while helping with regular cash flows, also ensures that the capital invested, adjusted for withdrawals, is still eligible for capital appreciation. This, similar to SIP, also ensures discipline and saves the capital from lump-sum, impulsive withdrawals.
To explain this with an example, assuming you make an one-time investment of ₹25 lakh and start an SWP from the succeeding month for ₹25,000 for 10 years, you will be left with a corpus of around ₹22.1 lakh after 10 years (after a gross withdrawal of ₹30 lakh), assuming an average return of 12 per cent over the period.