Strategic Withdrawal Planning: Everything you need to know about a Strategic Withdrawal Plan (SWP). | Jobs Vox


Many investors need monthly cash flow from their mutual funds to meet their expenses. Financial planners recommend that such investors use SWP, which helps meet those needs. SWPs can be set up in any open-ended mutual fund scheme, but most investors prefer to set up in an equity fund or hybrid fund.

What is a Strategic Withdrawal Plan (SWP)?

In SWPs, you invest a lump sum amount in a mutual fund scheme and then keep withdrawing a fixed amount, usually once a month, from the same scheme. This ensures that you will receive a certain amount of money at a fixed interval every month and that the balance will grow in line with the markets. Many retired individuals and senior citizens use this money to meet their monthly expenses.

What are the benefits of SWPs? How do you score over dividends in mutual funds?

Financial planners suggest that SWP is a safer tool for taking regular money than dividends. In an equity fund dividend scheme, neither the quantum nor the frequency of dividend is guaranteed and it largely depends on the market performance and the profitability of the asset management company. It works better than relying on mutual fund dividends for regular income as it brings stability of income.

How important is the tax aspect?

SWP is redemption of parts of the scheme. Therefore, the tax treatment of each withdrawal will be similar to that applicable to equity-oriented funds. Long-term capital gains of 10% is applicable for units held for more than one year, and 15% for units held for less than one year. In addition, equity-oriented capital gains of up to `1 lakh in a financial year are tax-free. In comparison, when you opt for dividends in a mutual fund scheme, there is tax on the dividends paid in relation to your tax slab, which can be as high as 42% for affluent investors. If the distribution is more than `5,000 per annum, the fund will deduct 10% TDS.

How does SWP start?

Investors generally use the growth option of an equity-focused or hybrid plan to start a SWP. Generally, investors avoid using sector funds. You can start investing in mutual funds. If you already have a mutual fund plan, you can activate the SWP option in the plan. To activate it, you simply need to fill an instruction form with AMC specifying the folio number, frequency of withdrawal, date of first withdrawal and bank account.


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