SWP stands for Systematic Withdrawal Plan, and as the name suggests, it refers to an individual’s plan to withdraw from their mutual fund scheme. The withdrawals can be made monthly, quarterly, or yearly from the investment date. You can choose the timing of their withdrawal, and this amount will be credited to your linked bank account by AMC. The only catch is that SWPs can be done only when you have units available in your account. An SWP plan is a good option if your main aim is to generate cash flow in your account.
The difference between a SIP and an SWP plan is simple. In the case of an SWP, you channel your investments into your bank accounts, whereas in SIP, you channel your bank account money into mutual funds scheme. The best characteristic of SWP in mutual funds is that you can take out the whole amount in the form of a systematic plan, or you can choose to withdraw the capital gains on the primary amount. This will enable you to remain invested and generate cash flow in your account.
Types of SWP
There are primarily two types of SWP in mutual funds. They are:
Fixed withdrawal scheme
In this scheme, you can choose the specified amount and period for the withdrawal. This scheme includes the total amount, i.e., primary investment and capital gains. You will have less flexibility in this scheme but higher cash flow.
Appreciation withdrawal scheme
In an appreciation withdrawal scheme, you can remain invested through your primary investment and only withdraw the required amount through appreciated value. It means the withdrawal of capital gains only.
Benefits of the SWP Plan
If you choose the dividend distribution scheme, then there will be TDS applicable. The Dividend Distribution Tax (DDT) percentage is 15%. You don’t have to pay any tax when you receive the amount under this scheme.
There is no tax deductible at source for the Systematic withdrawal plan. This means there won’t be any deduction for tax purposes at source when the amount is credited to your bank account. You will get the hundred per cent amount in your bank account.
Systematic withdrawal plans are one of the most flexible ways of withdrawing your money from the mutual fund scheme. Here, you can choose the amount and frequency of the withdrawals that cater to your needs. Plus, you can stop the SWP plan as and when you choose. Additionally, you can add further investments in the scheme or withdraw an additional amount above the fixed systematic withdrawal plan amount.
Regular source of income
SWP plans allow investors to create a regular source of income. This sort of plan will enable investors to withdraw systematically. The withdrawals are made from the investments already made. This is very convenient for people who don’t have any source of regular income. This plan can also prove to be very beneficial for retired people.
One of the benefits of the systematic withdrawal plan is that when the withdrawal rate is lower than the fund return, the investors get some capital appreciation too in the long term because there is a system of withdrawal involved. This system allows the investors to cope with the dynamic and unpredictable market. This also balances out losses one may incur in low AMC during a bear period.
One of the perks of a systematic withdrawal plan is that you will have an adjusted income per the market’s inflation. This ensures that you won’t outlive your savings. Generally, there is a cap of 5% or 6% withdrawal at a time in SWP, so if the inflation is 8% to 9% every year, then the balance will be beneficial. This is a highly helpful inflation adjustment during the retirement period.
Key Features of SWP
- Systematic investment plans help you create your pension. A systematic investment during your professional working period can help you make your pension in systematic withdrawals after retirement. This ensures a proper cash flow in your account that fulfils all your needs.
- You can protect your capital through SWPs through Arbitrage mutual fund schemes. If you are not accustomed to taking risks with your money, this is one of your safest investments. These schemes help in assured returns without any risk at all. Plus, they ensure you get back at least the amount you invested.
One of the most complex mechanisms to understand is the money market. The ups and downs of the graphs, the changing money policies, and the ever-changing numbers are not everyone’s cup of tea. Yet, every individual must invest money in certain schemes to ensure their safe future. SWPs in mutual funds is one of those solutions.
These plans are specially made for those who are not ready to take risks and are vulnerable to the inflation rate. Systematic withdrawal plans are made to sustain the growth rate of inflation and adjust the rupee cost ratio.
All you need to do is look for a plan that fits your needs with Piramal. You can always visit Piramal Finance to learn more about the economy and the stock market and choose other investment plans to secure your future.