What Is a Systematic Withdrawal Plan

When it comes to investing in mutual funds, you need to be aware of two concepts – a Systematic Investment Plan (SIP) and a Systematic Withdrawal Plan (SWP). SIP is a common method of investing in mutual funds. In this article, we’re going to delve into Systematic Withdrawal Plans and take a look at how they can benefit investors. A SWP, on the other hand, is a method used to redeem mutual funds.

What is a Systematic Withdrawal Plan?

It allows investors to gradually withdraw their mutual fund investments at specified intervals instead of redeeming them outright as a lump sum.

With this facility, you can choose the amount and frequency of withdrawals. Additionally, you can maintain the principal investment and withdraw only the returns.

Benefits of Systematic Withdrawal Plan

Besides its flexibility and freedom, the Systematic Withdrawal Plan offers plenty of other benefits as well. Let’s take a closer look at a few of them.

1. Regular Income

With the SWP facility, you will receive regular income. This will act as a secondary income that will help you pay for your regular expenses. If you use the income to pay for rent, you will have a significantly lower financial burden. If you prefer, you can invest it in a less risky and safer investment option, such as a bank RD.

2. Perfect For Retirement

When retirees don’t have a regular source of income to rely on, it can be difficult to pay for their monthly expenses and even cause them financial hardship. By opting for a Systematic Withdrawal Plan, they can create a regular income source that they can use to fund their lifestyles.

3. Future Capital Appreciation

If you redeem a mutual fund, all of its units will be sold. You will not be able to enjoy future capital appreciation through an increase in the fund’s NAV. However, with an SWP, because you only redeem a small portion of the total units each month, the remaining units will benefit from future NAV increases.

4. No Tax Deducted At Source

You don’t need to pay TDS (Tax Deducted at Source) on the amounts you receive through a Systematic Withdrawal Plan if you’re a resident individual investor.

5. Capital Protection

The initial capital that you invested in SWP will remain untouched and protected. In addition, the remaining capital will also benefit from future capital appreciation as the fund’s NAV rises.

Conclusion

Investors who are looking for a reliable income source will find the Systematic Withdrawal Plan to be a great option. You also get to save tax since you don’t have to pay any TDS on SWP redemptions. It is, however, the perfect time to invest in mutual funds if you haven’t already.

The first step towards investing in mutual funds is opening a demat account. EquityBox offers a free 2-in-1 trading and demat account you can get online. Once you have the account up and running, you can then proceed to invest in a mutual fund of your choice or maybe even venture into upcoming IPOs.