Understanding Systematic Withdrawal Plans: How SWPs can help you meet your cash needs

Financial planners believe that investors can use systematic withdrawal plans or SWPs from their mutual fund scheme to receive a monthly cash flow. Did you know that this method is considered one of the most tax-efficient ways to meet monthly expenses? Also, investors have the option to choose from equity funds, hybrid funds, or a combination of both to fulfill their needs.
So firstly, let’s understand in simple terms what a systematic withdrawal plan is: A systematic withdrawal plan (SWP) is a feature offered by open-end mutual fund schemes, allowing investors to withdraw a fixed amount of money every month. On a predetermined date, units from the scheme are sold, and the amount is transferred to the investor's bank account. The remaining units in the scheme continue to grow in line with the market. Many retired individuals and senior citizens rely on SWPs to generate a regular income and cover their monthly expenses.
SWPs offer several benefits compared to the dividend option in a fund.
Firstly, SWPs are considered a more reliable tool for monthly cash flows than dividends. In the dividend plan of an equity fund, the amount and frequency of dividend payouts, as well as the date of payout, are not guaranteed and depend on market movements and available profits in the scheme. SWPs provide stability of income, making them a preferred choice for investors seeking regular income.
Then there is tax efficiency! One of the reasons SWPs are considered tax-efficient is because they involve the redemption of units from the scheme, typically equity-oriented for taxation purposes. Therefore, the tax treatment of each withdrawal is the same as that applicable to equity-oriented funds.
For units held for more than a year, a long-term capital gains tax of 10% applies, while for units held for less than a year, it is 15%. Additionally, long-term capital gains of up to Rs 1 lakh in equity-oriented funds in a financial year are tax-free.
In contrast, opting for a dividend payout in a mutual fund scheme attracts tax based on the investor's tax slab, which could go up to 30% for those in higher tax brackets. If the dividend amount exceeds Rs 5,000 in a year, the fund house deducts 10% TDS, reducing the investor's cash flows.
However, before starting an SWP, investors should consider a few operational aspects. It is advisable to use the growth option of a large-cap, flexi-cap, multi-cap, or index fund of an equity-oriented hybrid scheme to initiate an SWP. Thematic sectoral funds and small or mid-cap schemes should be avoided.
The SWP can be activated at the time of investment or later. If the investor already has a mutual fund scheme, they can activate the SWP option by filling out an instruction slip with the AMC. The slip should include the folio number, withdrawal frequency, date for the first withdrawal, and the bank account to which the proceeds will be credited.