Systematic Withdrawal Plan (SWP)
What Is SWP?
A Systematic Withdrawal Plan (SWP) allows investors to withdraw a fixed amount from a
mutual fund scheme at regular intervals. It is particularly useful for individuals who need a
steady income stream, such as retirees, freelancers, or those funding recurring expenses
like school fees.
How Does SWP Work?
● Suppose you invest ₹10,00,000 in a mutual fund with a NAV of ₹100.
● You set up an SWP to withdraw ₹10,000 monthly.
● In the first month, 100 units are sold to provide the ₹10,000.
● If NAV increases next month, fewer units are sold; if NAV decreases, more units are
redeemed.
● Remaining units continue to generate returns, allowing your investment to grow while
supporting regular income.
Who Should Use an SWP?
● Retirees needing monthly income
● Freelancers/consultants desiring stable cash flow
● Parents funding children’s education
● Investors seeking tax-efficient withdrawals
● Anyone who wants to preserve capital while generating income
Pros of SWP
1. Regular Income: Acts like a pension.
2. Flexibility: Choose amount and frequency of withdrawals.
3. Capital Appreciation: Unused portion stays invested.
4. Predictability: Better than uncertain dividend payouts.
5. Tax Efficiency: Especially beneficial in equity funds.
Cons of SWP
1. Market Risk: NAV fluctuations may reduce principal.
2. Corpus Depletion: Withdrawing more than returns can exhaust capital.
3. Exit Load: If withdrawn within 1 year, some funds may charge a fee.
4. Tax Complexity: Each withdrawal includes capital gains calculations.
Taxation on SWP in India
Equity Mutual Funds:
● Held < 1 year: 15% Short-Term Capital Gains (STCG)
● Held > 1 year: 12.5% Long-Term Capital Gains (LTCG) on profits above ₹1.25
lakh/year
Debt Mutual Funds (Post-April 2023):
● Taxed as per individual income slab, irrespective of holding period
SWP vs Other Income Options
Feature SWP FD Monthly Pension Plans
Interest
Returns Market-linked 5–7% 4–8%
(8–14%)
Flexibility High Low Very low
Tax Treatment Capital Gains Interest (fully Pension income
taxable) (taxable)
Principal Not guaranteed Guaranteed Depends on plan
Protection
Liquidity High Low Low
Example Scenario
● Investment: ₹15 lakh in a balanced fund
● SWP: ₹15,000/month
● Annual returns expected: 10% (approx ₹1.5 lakh/year)
Scenario A: Withdrawing ₹1.5 lakh/year (matching returns) keeps corpus stable.
Scenario B: Withdrawing ₹2 lakh/year reduces principal slowly.
Best Funds for SWP
● Balanced Advantage Funds
● Equity Savings Funds
● Large Cap or Flexi Cap Funds (for long-term SWP)
● Low Duration Debt Funds (for short-term SWP)
Avoid small cap or sectoral funds for SWP due to high volatility.
How to Set Up an SWP
1. Choose a mutual fund scheme.
2. Decide withdrawal amount and frequency.
3. Apply via AMC website or third-party platforms.
4. SWP can be started post lock-in period.
5. Modify or stop anytime without penalty.
Advanced Tips
● Use STP + SWP strategy: slowly invest in equity and withdraw later.
● Maintain 1-year buffer in liquid fund to avoid selling during crashes.
● Ideal withdrawal rate: 4–6% annually for corpus longevity.
● Combine with dividends for dual income stream.
Final Thoughts
SWP is an effective tool to ensure a steady, predictable income stream while retaining the
growth potential of your investments. With proper planning, a diversified fund selection, and
disciplined withdrawals, SWP can provide both financial independence and peace of mind.
But it requires tracking returns, taxes, and your needs carefully. If unsure, consult a financial
advisor to design a strategy tailored to your lifestyle and goals.
