What is SWP in mutual funds?

 The automatic choice when investors want regular cash flow from their investments, the natural choice for majority is post office monthly income scheme or bank term deposits. However, due to declining interest rates of conventional investments, SWP in mutual fund is emerging as a popular choice amongst investors.

Also known as systematic withdrawal plan, it is a good investment option for investors needing regular cash flow from their mutual fund investments. The reasons are following –

SWP in mutual fund gives regular cash-flows to MF investors till such investors have sufficient unit balance in their account. As returns are not assured in mutual funds, investors can decide how much they want as cash flow and at what frequency. The frequency can be monthly, quarterly or annually.

If the withdrawals from systematic withdrawal plan is reasonable, investors can also expect capital appreciation over and above the regular cash flow. Usually, the returns from mutual funds is higher in the long term compared to traditional saving schemes.

Systematic withdrawal plan is also one of the most tax efficient income option for mutual fund investors.

What is Systematic Withdrawal Plan?

Through SWP in mutual fund (SWP), the investor can draw a fixed amount from their mutual fund investment account at a chosen frequency like, monthly, quarterly or annually. Investors can specify the day of the month/ quarter/ year when they want the withdrawal. Based on this request, the AMC sends direct credit to the bank account of the investor on the specified day. The systematic withdrawal plan continues as long as the investor has balance units in their mutual fund scheme account.

How SWP in mutual fund works?

SWP in mutual funds generates regular cash-flows for investors by redeeming units from their mutual fund scheme account at the specified intervals. The number of units to be redeemed to generate the cash-flows depends on the SWP withdrawal amount and the NAV of the scheme on the date of withdrawal. While, the investor’s unit balance will diminish over time, but if the scheme Net asset value appreciates at a rate faster than the investors SWP withdrawal rate, then in the long run, the investors total investment value will be higher.

In case investors want to know mutual fund NAV history of their mutual fund schemes, they can visit the mutual fund company website or the website of AMFI India.

What is the tax advantage of systematic withdrawal plan?

While interest earned on traditional investments are usually taxed as per the income tax rate of the investor, the gains of SWP in mutual funds are treated as capital gains.

Capital gain on equity schemes from SWP in mutual fund made within 1 year of investments are treated as short term and taxed @15% while gains after 1 year of investment are tax free upto Rs 1 Lakh in a financial year and taxed at 10% thereafter. Capital gains on systematic withdrawal plan from debt funds are added to income if the investments period is less than 3 years, if the period is more, it is taxed at 20% after indexation.

We discussed about various aspects of Systematic Withdrawal Plan. SWP in mutual fund is a smart and convenient option for getting predictable cash-flows from your investment; at the same time, there are multiple considerations that you need to be aware of, to get the desired results from your SWP. Before staring your SWP, if you want to know the mutual fund NAV history of the scheme you are investing in, do refer to the AMC or AMFI India website.

Comments

Post a Comment

Popular posts from this blog

Use Retirement planning calculator to ensure financial independence

Retirement Planning is one of the most important life-stage goals. Unfortunately, retirement planning does not get the importance it deserves. As a result many investors approach retirement with some trepidation about maintaining financial independence and their lifestyles after retirement. You should start planning retirement from the early stages of your working career to ensure financial security after retirement. In this article we will discuss why you should use a retirement planning calculator or pension plan calculator to plan savings and invests for your retirement goal. What is retirement planning? After retirement you will not get regular salaries and will have to depend on the income from your investments to meet your expenses. The goal of retirement planning is to maintain financial independence by accumulating a sufficiently large retirement corpus to meet all your needs. Why is retirement planning important? In India, the traditional family construct is joint fami...
Read more

How Mutual fund lump sum calculator is helpful

Lump sum investment, also referred to as one time investment, is investing your entire amount in one go. It is the simplest form of investments. Though Systematic Investment Plans (SIPs) have gained a lot of popularity in India, lump sum investments remain one of the most popular forms of investments. In this article, we will discuss about mutual fund lump sum investments and how to calculate its returns using the lumpsum calculator . When do you invest in lump sum? There are many instances when you prefer to invest in lump sum:- The most important requirement for investing in lump sum is availability of sufficient investible funds. If you have an investible corpus, you may prefer to invest in lump sum Salaried investors usually get their annual bonus once in a year. Since it is a relatively large sum, you may want to invest a portion of it or all of it, in lump sum. From time to time, you may receive windfall cash-flows e.g. maturity proceed of fixed deposits, recurring depo...
Read more

Mutual fund schemes and things to avoid in investment

Mutual fund is a way of investing one’s savings into funds that goes into various assets and categories, depending on the choice made by the investor. It is an investment vehicle, which is professionally managed and offer risk diversification. Mutual Fund schemes are a good investment option for the common man as they are accessible, affordable and can be started with a small amount.   There are various types of mutual fund schemes available - Equity Funds, debt funds and hybrid funds. The confusion in choice, generally lies in the type of equity or debt fund to be selected, the time period of investment and the goal which one is working towards. All these questions are rather pieces of the same puzzle which need to be selected carefully, after research, in order to give you the perfect picture. The major reason why people invest in mutual funds is to create wealth. However, investor should avoid some common investing mistakes as given below - Ignoring one’s risk profile - On...
Read more