There may be times when investors have to resort to encashing their holdings in mutual funds owing to a personal financial emergency. This exit from a mutual fund scheme is called a mutual fund redemption.
Redemptions can be done phase-wise through a facility called the Systematic Withdrawal Plan (SWP), an increasingly popular option with mutual fund investments.
What is A Systematic Withdrawal Plan?
Systematic Withdrawal Plan (SWP) is a phased redemption plan for the sum invested in a mutual fund scheme. They are the same as the fund returning one's invested capital in instalments. Hence, the flows move from the mutual fund to one's savings account. This is the exact opposite vs an SIP, where the flow of monies is from the savings account to the mutual fund account.
In a SWP, one has the liberty to either withdraw ones capital gains from the fund or a fixed amount that one desires. Post withdrawal, the remainder part of the fund stays invested in the same scheme. Thus, these SWPs act as a regular source of income, keeping some part invested still.
SWP Withdrawal Option
The amount redeemed can either come from the principal or the capital gain accrued. We can either opt to receive this amount on a monthly basis or even on a quarterly basis.
Benefits of SWP
1. Prepare for Market fluctuation
If the NAVs (Net Asset Value) are higher, which is generally the case during a bull market, less number of units are redeemed. On the other hand if the market is bearish and NAVs are on the lower side, more number of mutual fund units are redeemed.
2. Source of Alternate Cash Flows
SWPs can act as a source of alternate cash flows without a TDS (Tax Deductible at Source) liability. Thus they are not subject to double taxation i.e. TDS + capital gains tax, unlike other instruments.
3. Facility for Withdrawing Appreciation Fund
SWPs allow for withdrawal of solely the appreciated part of the mutual fund investment. This keeps one's base capital invested while providing additional cash flows.
Tax Implication of SWP
SWP redemptions are subject to tax implications. These taxes majorly comprise of capital gains tax to be levied on the appreciated mutual fund.
The capital gain tax is applicable as per the equity or the debt scheme one has opted for.
Nowadays, most fund houses provide an SWP calculator, using which one can plan and simulate withdrawals suited to one's requirements.
The input on these calculators are the investment amount one had made, the duration of the investment, the SWP amount and whether the withdrawal has to be made on a monthly or quarterly basis. SWP start and end dates are also to be mentioned along with the above data.
The calculator prompts a schedule of one's investments, the net value of the fund post withdrawal of SWPs and the net redeemable units of the fund. This information helps one effectively plan one's SWPs, such that one can time the withdrawal to effectively meet one's financial goals, while maximising returns on the investments made.
Some Representative SWP Mutual Funds
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