How to start a systematic withdrawal plan (SWP) in a mutual fund online
A systematic withdrawal plan (SWP) is a smart financial strategy that allows you to receive regular income from your mutual fund investments. While a systematic investment plan (SIP) helps you build wealth, an SWP helps you utilize it effectively. By automating your withdrawals, you can maintain a steady cash flow while keeping your remaining capital invested for future growth.
What is a systematic withdrawal plan (SWP)?
Think of an SWP as the “reverse” of an SIP. Instead of depositing a fixed amount into a fund every month, you withdraw a fixed amount at your chosen frequency—monthly, quarterly, or annually.
There are two primary ways to set up an SWP:
- Fixed amount: You receive a specific sum (e.g., ₹5,000 or ₹10,000) every month regardless of market performance.
- Appreciation withdrawal: You only withdraw the profits earned on your investment, leaving your original principal untouched.
Choosing the right mutual fund for your SWP
Your choice of fund should align with your risk tolerance and how long you need the income to last:
- Debt mutual funds: Ideal for those seeking stability and consistent income with low volatility.
- Hybrid funds: A balanced mix of equity and debt, offering moderate growth potential with a buffer against market dips.
- Equity mutual funds: Best for long-term growth, but risky for immediate SWPs. If the market drops significantly, withdrawing a fixed amount can quickly deplete your total units (Capital Erosion).
Step-by-step: How to start an SWP online
Setting up an SWP is a straightforward digital process through your fund house (AMC) website or investment app:
- Log in: Access your mutual fund account or investment platform. Ensure your KYC (know your customer) status is updated.
- Select the scheme: Choose the specific mutual fund folio from which you wish to withdraw.
- Initiate SWP: Navigate to the “transaction” or “systematic plans” section and select SWP.
- Configure your plan:
- Enter the withdrawal amount.
- Select the frequency (monthly is most common).
- Choose the start date.
- Link bank details: Confirm the bank account where you want the funds deposited. Most platforms use your registered primary bank account by default.
- Review and authenticate: Check the details and confirm the request (usually via an OTP sent to your phone or email).
Essential tips for a successful SWP
- Watch out for exit loads
Many funds charge an Exit Load (typically 1%) if you withdraw units within 12 months of purchase. Before starting an SWP, ensure your investment has stayed in the fund long enough to avoid these unnecessary fees.
- Understand the tax implications
Every withdrawal in an SWP is treated as a “Redemption.”
- Equity funds: Gains are taxed as Short-Term Capital Gains (STCG) if held for less than a year, or Long-Term Capital Gains (LTCG) if held longer.
- Debt funds: Debt funds are taxed according to your income tax slab, regardless of the holding period. Always consult a tax advisor for the latest rates.
- Avoid “capital erosion”
If your withdrawal rate is 10% but your fund only grows by 7%, you are eating into your original principal. To keep your investment sustainable for decades, aim for a withdrawal rate that is lower than the expected average annual return of the fund.
- Periodic review
Markets change, and so do your needs. Review your SWP once a year to see if you need to increase the amount for inflation or decrease it if the market is underperforming.
Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.