A Systematic Withdrawal Plan (SWP) is a popular investment option offered by mutual fund companies that allow investors to withdraw a fixed amount of money from their mutual fund investment at regular intervals.
SWP is a useful investment strategy for investors who are looking to generate a regular income stream from their mutual fund investment while keeping their principal amount intact.
In this article, we will discuss in detail what SWP in mutual funds is, how it works, its benefits, and its potential drawbacks.
What Is SWP in Mutual Funds?
SWP in mutual funds is an investment strategy that allows investors to withdraw a fixed amount of money from their mutual fund investment at regular intervals. Under an SWP, investors can choose the amount they want to withdraw and the frequency of withdrawals.
SWP is a great investment option for investors who are looking to generate a regular income stream from their mutual fund investment while keeping their principal amount intact. It allows investors to withdraw a fixed amount of money at regular intervals, usually monthly or quarterly, without having to sell their mutual fund units.
How Does SWP Work?
SWP works in a similar way to Systematic Investment Plan (SIP) in mutual funds. Under an SWP, investors can choose the amount they want to withdraw and the frequency of withdrawals. The mutual fund company then deducts the withdrawal amount from the investor’s mutual fund units and transfers the money to the investor’s bank account.
For example, if an investor has invested Rs. 10 lakhs in a mutual fund and has chosen to withdraw Rs. 10,000 per month through an SWP, the mutual fund company will deduct Rs. 10,000 from the investor’s mutual fund units each month and transfer the money to the investor’s bank account.
Benefits of SWP in Mutual Funds
Regular Income Stream
SWP is a great investment option for investors who are looking to generate a regular income stream from their mutual fund investment. It allows investors to withdraw a fixed amount of money at regular intervals, usually monthly or quarterly, without having to sell their mutual fund units.
Flexibility
SWP offers investors the flexibility to choose the amount they want to withdraw and the frequency of withdrawals. This makes it a convenient investment option for investors who want to customize their investment strategy according to their financial needs and goals.
Capital Preservation
SWP allows investors to generate a regular income stream while keeping their principal amount intact. This is because the mutual fund company deducts the withdrawal amount from the investor’s mutual fund units, and the remaining units continue to appreciate in value.
Tax Benefits
SWP offers investors tax benefits on the withdrawn amount. If the investor has held the mutual fund units for more than 12 months, the withdrawn amount is treated as long-term capital gains and is taxed at a lower rate compared to short-term capital gains.
Cost-Effective
SWP is a cost-effective investment option for investors who are looking to generate a regular income stream. Since investors do not have to sell their mutual fund units, they do not have to pay any exit load or brokerage fees.
Drawbacks of SWP in Mutual Funds
Market Risk
SWP is subject to market risk, and the performance of the mutual fund investment can fluctuate depending on market conditions. If the market performs poorly, the value of the mutual fund investment can decline, and the investor may have to withdraw a higher number of units to generate the same amount of income.
No Guarantee
SWP does not guarantee a fixed income stream, and the amount of income generated can vary depending on market conditions and the performance of the mutual fund investment.
Inflation Risk
SWP does not offer protection against inflation, and the purchasing power of the income generated can decline over time if it is not adjusted for inflation.
Exit Load
Some mutual fund companies charge an exit load on SWP withdrawals, which can reduce the investor’s returns.
Liquidity Risk
SWP can reduce the liquidity of the mutual fund investment since the investor is withdrawing a fixed amount of money at regular intervals.
Top 5 Things to Consider Before Investing in SWP
Financial Goals
Before investing in SWP, investors should evaluate their financial goals and determine if SWP aligns with their investment strategy.
Risk Appetite
Investors should evaluate their risk appetite and determine if they are comfortable with the market risk associated with SWP.
Investment Horizon
Investors should evaluate their investment horizon and determine if SWP is a suitable investment option for their investment horizon.
Tax Implications
Investors should evaluate the tax implications of SWP and determine if it aligns with their tax planning strategy.
Fund Performance
Investors should evaluate the performance of the mutual fund they are investing in and determine if it has a consistent track record of generating returns.
Top 5 SWP Mutual Funds in India
HDFC Balanced Advantage Fund
HDFC Balanced Advantage Fund is a popular SWP mutual fund in India that invests in a mix of equity and debt securities. The fund has a consistent track record of generating returns and offers investors the flexibility to choose their SWP amount and frequency.
ICICI Prudential Equity & Debt Fund
ICICI Prudential Equity & Debt Fund is a balanced mutual fund that invests in a mix of equity and debt securities. The fund has a consistent track record of generating returns and offers investors the flexibility to choose their SWP amount and frequency.
Kotak Standard Multicap Fund
Kotak Standard Multicap Fund is a diversified equity mutual fund that invests in a mix of large-cap, mid-cap, and small-cap stocks. The fund has a consistent track record of generating returns and offers investors the flexibility to choose their SWP amount and frequency.
SBI Equity Hybrid Fund
SBI Equity Hybrid Fund is a hybrid mutual fund that invests in a mix of equity and debt securities. The fund has a consistent track record of generating returns and offers investors the flexibility to choose their SWP amount and frequency.
Aditya Birla Sun Life Equity Hybrid ’95 Fund
Aditya Birla Sun Life Equity Hybrid ’95 Fund is a balanced mutual fund that invests in a mix of equity and debt securities. The fund has a consistent track record of generating returns and offers investors the flexibility to choose their SWP amount and frequency.
Conclusion
SWP in mutual funds is a useful investment option for investors who are looking to generate a regular income stream from their mutual fund investment while keeping their principal amount intact.
SWP allows investors to withdraw a fixed amount of money at regular intervals, usually monthly or quarterly, without having to sell their mutual fund units. However, investors should evaluate their financial goals, risk appetite, investment horizon, tax implications, and fund performance before investing in SWP.
They should also be aware of the potential drawbacks of SWP, such as market risk, no guarantee, inflation risk, exit load, and liquidity risk. Finally, investors should choose SWP mutual funds that have a consistent track record of generating returns and offer flexibility in SWP amount and frequency.