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SWP is designed to help you access the wealth you’ve built by allowing regular withdrawals from your mutual fund portfolio.
SIP and SWP are two complementary but opposite strategies.
For investors who have accumulated a significant portfolio and are now seeking a stable income stream, the Systematic Withdrawal Plan (SWP) offers an excellent option. Unlike the Systematic Investment Plan (SIP), which focuses on growing wealth through regular contributions, SWP allows you to withdraw a fixed amount at regular intervals from your mutual fund investments. This method is especially useful for retirees or individuals needing consistent cash flow without having to sell units manually. In this article, we’ll dive into how SWP works, its key benefits, and how it can help you manage your finances while enjoying the returns on your investments.
What Is SWP In Mutual Fund and How It Works?
SWP stands for Systematic Withdrawal Plan. It is a facility provided by mutual funds that allows investors to withdraw a fixed amount periodically from their mutual fund investments. This option is ideal for those who need regular income, such as retirees or anyone who requires funds for specific financial goals.
Key Benefits of SWP:
Regular Income: Enjoy consistent withdrawals from your investment, ensuring a steady cash flow.
Flexibility: You can choose the amount and frequency of withdrawals.
Reduced Need for Manual Selling: SWP automates the process of withdrawing funds, eliminating the need to sell units manually.
How SWP Works:
Amount and Frequency: You can determine the withdrawal amount (e.g., monthly, quarterly, etc.) and the frequency that suits your needs.
Source of Withdrawal: Withdrawals can come from either the capital gains or the principal, depending on the performance of the mutual fund.
Taxation: For equity mutual funds, gains are classified as short-term capital gains (STCG) if held for 12 months or less. If held for more than 12 months, they are considered long-term capital gains (LTCG). For debt mutual funds, taxation follows the investor’s applicable tax slab, regardless of the holding period.
STCG: 20% (for holdings of 1 year or less)
LTCG: 12.5% (on gains exceeding Rs 1.25 lakh for holdings over 1 year)
Gains from other mutual funds are considered short-term if held for less than 24 months and long-term if held for more than 24 months.
SWP vs. Mutual Fund SIP: What’s the Difference?
SIP and SWP are two complementary but opposite strategies. Here’s a breakdown of their differences:
| Aspect | SIP | SWP |
| Objective | Build wealth over time with regular investments | Generate regular income from accumulated corpus |
| Investment Flow | Invest a fixed sum (e.g., Rs 5,000) into mutual funds at the prevailing NAV | Withdraw a fixed sum (e.g., Rs 5,000) periodically from the mutual fund |
| Use Case | Best for long-term goals like retirement, buying property, or education | Ideal for retirees or anyone needing regular cash flow |
| Cash Flow | Outflow of cash from you to the mutual fund | Inflow of cash from the mutual fund to you |
| Duration | Typically long-term (5-10 years or more) | Can be short-term or long-term, based on income needs |
| Impact on Principal | Principal grows over time, benefiting from compounding | Principal decreases over time due to regular withdrawals |
| Taxation | Based on mutual fund type and holding period (LTCG or STCG) | Depends on the holding period of the units being withdrawn (LTCG or STCG) |
| Flexibility | Flexible amount and frequency, can be adjusted anytime | Flexible withdrawals, amount and frequency can be modified |
Summary:
SIP is focused on growing your wealth by making regular contributions to a mutual fund over time.
SWP is designed to help you access the wealth you’ve built by allowing regular withdrawals from your mutual fund portfolio.
Both strategies offer a disciplined approach to mutual fund investing but serve different financial needs—SIP for wealth creation and SWP for income generation.
Disclaimer: The views and investment tips by experts in this News18.com report are their own and not those of the website or its management. Readers are advised to check with certified experts before making any investment decisions.
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