What is a Systematic Withdrawal Plan?
In this scheme, you have an option to withdraw a fixed or variable amount from your mutual fund scheme on a pre-set date, either monthly, quarterly, semi-annually or annually depending on your financial goals. SWP gives you a regular income and returns on your capital get reinvested in your scheme. The scheme is designed to offer a good secondary income if you need to pay for your child’s education or help your elderly parents on day-to-day expenses.
How does an SWP work?
A systematic withdrawal plan works exactly the reverse way to a systematic investment plan. Here you save or invest a fixed sum of money at regular intervals where you can withdraw a fixed sum of money from your investments on a regular basis.
It is different from opening a fixed deposit account in a bank where a monthly interest is credited. On a fixed deposit, the corpus value is not impacted when the interest is not.
With a fixed deposit the corpus value is not impacted when you withdraw the interest but in the case of a systematic withdrawal plan in mutual fund schemes, the value of your fund is reduced by the number of units you withdraw.
Why is an SWP a good investment option?Systematic withdrawal plans can be very useful when accurately handled and disastrous when managed improperly. An SWP if used prudently can be a wise investment strategy. The withdrawals or redemptions do not attract tax deducted at source however, the capital gains are taxed, on the amount withdrawn. If you want to remain invested and enjoy gains on regular intervals you need to set up your withdrawals in a way so only the appreciation is drawn on the investment amount.