A Systematic Withdrawal Plan (SWP) is a tool that allows you to withdraw a fixed amount of money at pre-specified intervals. The money you withdraw can be held by you in cash or reinvested. SWPs are a smart choice for those investors who wish to invest today to earn capital appreciation on their saved up money but also seek a periodic income over the long term.

Effective use of a SWP

You can use a SWP to generate regular income; this is especially for those who are looking to plan for their retirement years, or fund some other activity that requires a fixed amount of money at regular intervals. SWPs make sense because:

• You get an income irrespective of gains or losses on your investments. This is called fixed withdrawal.

• You have the option to set up a SWP in such a way that only gains on investment are withdrawn regularly. This is called appreciation withdrawal.

As an example, let’s consider an investor who wants an income of Rs. 1,000 per month. He invests in 2,000 units of an SWP equity mutual fund at a NAV of Rs. 10. This means that his total investment is Rs. 20,000. Moreover, let’s assume that for the time period under consideration, the average monthly rate of return is 1%.

In the above example, the investor is taking out a regular income from his mutual fund, and irrespective of market movement, he is able to keep withdrawing a fixed amount of money.

How are SWPs taxed?

A SWP is nothing but redemption of units from the scheme; the tax treatment of each withdrawal will be the same as in the case of STP given above depending upon the category to which they belong i.e. Equity Oriented Funds (exposure to domestic listed equity shares more than 65%), Specified mutual Funds (exposure to domestic equity shares upto 35%) and non equity oriented funds other than specified mutual funds (exposure to domestic listed equity shares more than 35% but less than 65%)