What is SWP in Mutual Fund? Meaning

Systematic withdrawal plan is a beautiful way to maximize your returns on Mutual Fund investments while getting a monthly return. With a SWP, you can withdraw a fixed or a variable amount periodically.

Why should you use SWP?

While many people withdraw money from a mutual fund by just selling off their units in bulk or in fragments, a SWP facility offered by mutual fund can be a better way to plan your mutual fund withdrawals; here is why you should think about a SWP facility:

Automated Withdrawals: You can issue standing instructions to your mutual fund and bank to transfer the pre-determined SWP into your bank account at a particular date each month/quarter.

Book profits systematically: After years of investment, you should reap the benefits of your long-term investment in equity mutual funds systematically. SWPs allow you to gradually withdraw from the funds, while the non-withdrawn corpus can still earn market linked returns.

Solution to many financial needs: SWPs address a number of financial needs for investors. They can be used to create a regular additional stream of income for investors which can be used for children's education, rent, regular medical expenses or just for supporting regular expenses. SWPs are also an ideal choice for funding regular income during retirement years.

How does a SWP work?

In order to start a SWP, you usually need to fill a SWP form or you can make your SWP application online on the mutual fund’s website. There are two options for SWPs:

Fixed Periodic Withdrawal: This allows you to withdraw a fixed sum at regular intervals. On the fixed date, units equivalent to SWP amount are redeemed and the money is transferred to your bank account.

Tax implications of SWP

A big reason to use SWP is its tax efficiency. Taxes are not deducted at source on a SWP. If your holding term for debt funds is less than 36 months, the capital gains you realize will be added to your overall income and taxed at the rate specified by your income tax bracket. If the holding period exceeds 36 months, the capital gains are deemed "long-term" and are subject to indexation-based taxation at a rate of 20%. If your holding term for equity funds is less than a year, the capital gains you realize will be taxed at a rate of 15%. However, if the holding period exceeds a year, you realize long-term capital gains, which are subject to a 10% flat tax without regard to inflation.

Now that you know what is SWP, you have the ability to better manage your redemptions from mutual funds to take advantage of their potential to create regular income, book profits regularly and save taxes.

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