Short for Systematic Withdrawal Plan, SWP is one of the types of mutual funds where the investor can withdraw a fixed amount at regular intervals. Investors looking to earn a regular income from their mutual fund investments can go for SWP.
The regular income of an SWP is generated through the redemption of units of the scheme at the decided interval. Depending on the SWP income amount and the NAV of the scheme, units are redeemed, which generates the cash. This cash is then transferred by the Asset Management Company (AMC) to the investor’s bank account.
So, let's assume that an investor invested a lump sum of Rs 10 lakhs five years ago at a NAV of Rs 10. If the NAV is now Rs 25, and the income is Rs 10,000, 400 units will be redeemed to generate each regular income.
The income can be generated at monthly, quarterly, half-yearly, and annual intervals.
Income source – SWP becomes a secondary income source for the investor, which can be a boost to their monthly budget. Besides, it can be used to fulfill their travel aspirations, take a sabbatical, or a study break without having to worry about an income source.
Alternative to pension – Pensions are no longer an add-on in many jobs. The employee often uses their own resources to create a pension fund. Such people can plan for an SWP as an alternative to pension or annuity schemes.
Flexible investment – In an SWP, you can decide your withdrawal amount and frequency. You can make additional deposits into it and also withdraw over and above your regular SWP income. This makes SWP a much more flexible option compared to pensions.
Capital appreciation – As the NAV of the scheme increases, the investment value appreciates. If your withdrawal rate is lower than the return rate, your SWP investment will gain long-term capital appreciation.
In the case of equity SWP funds, redemptions made within 12 months will be treated as short-term capital gains, while holdings redeemed beyond one year is long-term capital gain. Short-term capital gains will be taxable at 15% while long-term at 10%. Long-term capital gains up to Rs 1 lakh are not taxed.
Capital gain from non-equity funds will be taxed as short-term capital gains for up to three years of holding period. It will be taxed as per the income tax slab of the investor. Long-term capital gain, on the other hand, is taxed at 20% and has indexation benefits.
With the Tata Capital Moneyfy App, you can find out the SWP that suits your financial goals. Your Moneyfy profile helps you select from a wide range of mutual funds at the click of a button and invest towards a financially secure future.
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