Mutual Fund SWP: Need money? Mutual Fund SWP plan offers regular income benefit, know rules and tax calculation
Mutual Fund SWP: Investing in mutual funds has become increasingly popular, but many are unaware that it can also be used to generate regular income. A Systematic Withdrawal Plan (SWP) in Mutual Funds offers a strategic way to access funds from your investments without liquidating your entire portfolio. Simply put, it works in the reverse of a Systematic Investment Plan (SIP). While in a SIP you add money regularly, in an SWP, you withdraw a fixed sum at predetermined intervals—monthly, quarterly, or annually. SWPs are ideal for investors who want a consistent cash flow while keeping their money invested.
How SWP Works
Setting up an SWP is straightforward. First, you choose a mutual fund you already own, determine the withdrawal amount, and set the frequency for disbursements. Once activated, the mutual fund redeems the necessary units and transfers the proceeds directly to your bank account.
The significant advantage here is that the remaining units stay invested, allowing your portfolio to continue growing even when you are withdrawing funds. A key principle behind SWPs is FIFO (First In, First Out). Every withdrawal sells the earliest-purchased units first. This directly impacts taxation because the tax rate depends on how long each unit has been held.
Difference Between SIP and SWP
There is often confusion between SIP and SWP. A SIP is a strategy for investing a fixed sum of money at regular intervals in mutual funds. This disciplined approach enables investors to build wealth steadily by consistently contributing small amounts over time, instead of making a one-time lump sum investment. Conversely, SWP is the process of withdrawing from that accumulated wealth, which is extremely helpful for post-retirement needs or regular expenses.
Tax Implications for Equity and Debt Funds
Understanding the tax implications is crucial before opting for an SWP. The rules differ for equity and debt funds.
| Fund Type | Holding Period | Tax Rate |
|---|---|---|
| Equity Mutual Funds | More than 12 months | 12.5% on gains above Rs 1.25 lakh (Long-Term) |
| Equity Mutual Funds | Less than 1 year | 20% (Short-Term Capital Gains) |
| Debt Funds | Any period | As per investor’s income slab (No indexation benefit) |
Since FIFO sells older units first, many withdrawals end up falling under the long-term category for investors who have invested for a while, making SWPs potentially tax-efficient for long-term equity investors. On the other hand, debt funds do not offer the same advantage. All gains are taxed according to the investor’s income slab, which means SWPs from debt-oriented funds can result in higher tax obligations compared to equity-focused funds.
Sustainability and Flexibility
It is important to note that an SWP does not automatically ensure that your investment lasts forever. The longevity of the plan depends on the withdrawal amount relative to the fund’s returns. Withdrawing more than the fund earns will reduce your units over time, shrinking the corpus. However, a moderate withdrawal can provide steady payouts for years.
Another advantage of SWPs is flexibility; you can adjust the withdrawal amount, pause the plan, or redeem the remaining units at any time. Lock-in restrictions only apply if the fund itself has one, such as an ELSS with a three-year lock-in.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Mutual Fund investments are subject to market risks. Please consult your financial advisor and read all scheme-related documents carefully before investing.
