Systematic Withdrawal Plans (SWPs)

Systematic Withdrawal Plans (SWPs) are investment strategies where mutual fund investors periodically withdraw a predetermined amount from their holdings, providing a steady income stream without the need for lump-sum withdrawals. This approach is particularly useful for managing cash flow needs during retirement or supplementing regular income, allowing investors to liquidate their investments systematically over time. SWPs offer flexibility in withdrawal frequency, enabling investors to tailor their payout schedule to meet specific financial requirements.

However, when implementing SWPs, it’s crucial to consider factors such as tax implications, fund performance, and market conditions to ensure alignment with long-term financial goals. Additionally, investors should evaluate the impact of inflation and the potential erosion of purchasing power when determining withdrawal amounts. Despite these considerations, SWPs offer a disciplined approach to managing withdrawals, providing financial stability and peace of mind for those seeking regular income while maintaining their investment portfolios.

key features

● Regular Income Stream: SWPs provide a consistent income by allowing investors to withdraw a predetermined amount at regular intervals, such as monthly, quarterly, or annually.

● Flexibility: Investors can choose the frequency and amount of withdrawals to suit their financial needs, enabling a tailored approach to cash flow management.

● Capital Preservation: SWPs allow for gradual liquidation of investment holdings, helping to preserve capital, especially during market downturns.

● Dollar-Cost Averaging: Regular withdrawals can benefit from dollar-cost averaging, potentially reducing the impact of market volatility on overall returns.

● Tax Efficiency: Depending on the tax laws and investment type, SWPs may offer tax advantages, with withdrawals sometimes subject to lower tax rates or preferential treatment.

● Automatic Reinvestment: Withdrawn amounts can often be reinvested into another investment option within the same or a different mutual fund, allowing for continued growth.

● Simplicity: Easy to set up and manage, SWPs require minimal ongoing oversight, making them a convenient option for generating regular income.

● Risk Management: SWPs help manage longevity risk by providing a predictable income stream during retirement, ensuring that investors do not outlive their savings.

Benefits of Systematic Withdrawal Plans (SWPs)

Regular Income

SWPs ensure a steady income, crucial for retirees or those needing to supplement other income sources.

Flexible Withdrawals

Investors can adjust withdrawal frequency and amounts based on changing financial needs or unexpected expenses.

Capital Preservation

Gradual liquidation helps preserve capital and reduces the risk of selling during market downturns.

Dollar-Cost Averaging

Regular withdrawals help reduce the impact of market volatility by averaging out investment returns over time.

Tax Efficiency

SWPs can offer tax benefits, depending on the investment type and location, such as lower tax rates or preferential treatment.

Automatic Reinvestment

Withdrawn amounts can often be reinvested, allowing investments to grow while generating income.

Simplicity

Easy to set up and manage, SWPs require minimal ongoing management, making them a convenient income strategy.

Risk Management

SWPs help manage longevity risk by providing a consistent income stream throughout retirement, ensuring that savings last longer.

Calculation of Systematic Withdrawal Plans (SWPs)

Calculating SWPs involves several key steps to ensure that the withdrawals meet your financial needs while managing your investment portfolio effectively. Here’s a detailed guide:

Define Income Needs: Start by determining how much income you need regularly. This amount should be based on your monthly expenses, retirement goals, or other financial obligations.
Assess Portfolio Value: Calculate the total value of your investment portfolio, including mutual funds, stocks, bonds, or other assets. This will provide a baseline for determining how much you can withdraw.
Choose Withdrawal Frequency: Decide how often you want to make withdrawals. Options typically include monthly, quarterly, semi-annually, or annually. Choose a frequency that aligns with your income needs and cash flow requirements.
Select Withdrawal Amount: Determine the amount to withdraw each period. This can be a fixed amount or a percentage of the portfolio value. Ensure this amount is sustainable over time, considering factors such as inflation, investment returns, and taxes.
Calculate Withdrawal Amount: For a fixed withdrawal amount, divide the total desired annual income by the number of withdrawal periods per year (e.g., 12 for monthly withdrawals). For percentage-based withdrawals, multiply the chosen percentage by the current portfolio value.
Review Investment Performance: Regularly monitor your investment portfolio’s performance to ensure it can sustain the planned withdrawals. Adjust the withdrawal amounts or frequency as needed based on changes in returns or financial goals.
Consider Tax Implications: Be aware of the tax implications of your withdrawals, including taxes on investment gains or income. Consult with a tax advisor to optimize your strategy for tax efficiency.
Factor in Inflation and Longevity: Account for inflation and the potential need for income over an extended period, particularly during retirement. Periodically adjust withdrawal amounts to maintain purchasing power and ensure your savings last.
Review Withdrawal Strategy: Regularly review and adjust your SWP strategy based on changes in your financial circumstances, investment performance, and income needs. This helps align your strategy with evolving goals and market conditions.

By following these steps, you can effectively calculate and manage your SWPs to ensure a reliable income stream while maintaining the health of your investment portfolio. Regular reviews and adjustments will help keep your strategy on track to meet your long-term financial goals.

Example of Systematic Withdrawal Plan (SWP)

An investor with a ₹1,000,000 portfolio wants ₹25,000 quarterly. Here’s how to set it up:

Income Needs: ₹25,000 every three months.
Portfolio Value: ₹1,000,000.
Withdrawal Frequency: Quarterly.
Annual Income Requirement: ₹25,000 × 4 = ₹1,00,000.
Withdrawal Percentage: ₹1,00,000 / ₹1,000,000 = 10% annually.
Quarterly Withdrawal Amount: ₹25,000.

Steps:

Monitor Performance: Ensure the portfolio can sustain withdrawals and adjust if needed.
Tax Implications: Consult a tax advisor for optimal tax planning.
Inflation: Periodically adjust withdrawals to maintain purchasing power.
Review Strategy: Regularly reassess based on financial needs and market conditions.

This method ensures a steady income while managing the portfolio effectively.

Example of Systematic Withdrawal Plan

As mentioned before, the SWP allows investors to generate both monthly revenue as well as an accumulated sum at the end of the maturity period. Refer to this investment and withdrawal schedule for an in-depth idea.

Here, an individual has invested Rs. 50,000 for tenure of 1 year along with a systematic withdrawal of Rs. 1,000 per month. Interest rate stands at 10%.

As such, total return of investments after the end of the tenor stands at Rs. 4,565.

Month	Balance at Begin	Withdrawal	Interest Earned
1	50,000	Rs. 1,000	Rs. 408
2	Rs. 49,408	Rs. 1,000	Rs. 403
3	Rs. 48,812	Rs. 1,000	Rs. 398
4	Rs. 48,210	Rs. 1,000	Rs. 393
5	Rs. 47,604	Rs. 1,000	Rs. 388
6	Rs. 46,992	Rs. 1,000	Rs. 383
7	Rs. 46,375	Rs. 1,000	Rs. 378
8	Rs. 45,753	Rs. 1,000	Rs. 373
9	Rs. 45,126	Rs. 1,000	Rs. 368
10	Rs. 44,494	Rs. 1,000	Rs. 362
11	Rs. 43,856	Rs. 1,000	Rs. 357
12	Rs. 43,214	Rs. 1,000	Rs. 352

Top SWP Funds – Best Fund For SWP

The table below shows the Top SWP Funds based on AUM & NAV.

Name	AUM (Cr)	NAV (Rs)
SBI Equity Hybrid Fund	65010.1	270.99
ICICI Pru Equity & Debt Fund	32429.17	363.46
HDFC Hybrid Equity Fund	22473.57	110.77
Canara Rob Equity Hybrid Fund	9808.56	339.97
Aditya Birla SL Equity Hybrid ’95 Fund	7409.41	1432.22
Tata Hybrid Equity Fund	3693.58	430.39
Nippon India Equity Hybrid Fund	3398.95	99.87
Quant Absolute Fund	1787.77	419.51
Franklin India Equity Hybrid Fund	1701.32	261.55
PGIM India Hybrid Equity Fund	210.01	129.49

Best Fund For SWP

The table below shows the Best Fund For SWP based on the lowest to highest expense ratio.

Name	Expense Ratio %
Canara Rob Equity Hybrid Fund	0.64
PGIM India Hybrid Equity Fund	0.69
SBI Equity Hybrid Fund	0.76
Quant Absolute Fund	0.83
Tata Hybrid Equity Fund	0.97
HDFC Hybrid Equity Fund	1.01
ICICI Pru Equity & Debt Fund	1.02
Aditya Birla SL Equity Hybrid ’95 Fund	1.07
Franklin India Equity Hybrid Fund	1.19
Nippon India Equity Hybrid Fund	1.21

Best SWP In Mutual Fund

The table below shows the Best SWP In Mutual Funds based on the Highest 5Y CAGR.

Name	CAGR 5Y (Cr)
Quant Absolute Fund	25.36
ICICI Pru Equity & Debt Fund	20.89
Canara Rob Equity Hybrid Fund	15.72
Franklin India Equity Hybrid Fund	15.63
HDFC Hybrid Equity Fund	14.88
Tata Hybrid Equity Fund	14.4
SBI Equity Hybrid Fund	14.21
PGIM India Hybrid Equity Fund	12.47
Aditya Birla SL Equity Hybrid ’95 Fund	12.41
Nippon India Equity Hybrid Fund	11.51

Top SWP Funds

The table below shows the Top SWP Funds based on exit load, which is the fee the AMC charges investors when they exit or redeem their fund units.

Name	Exit Load %	AMC
PGIM India Hybrid Equity Fund	0.5	PGIM India Asset Management Private Limited
SBI Equity Hybrid Fund	1.0	SBI Funds Management Limited
ICICI Pru Equity & Debt Fund	1.0	ICICI Prudential Asset Management Company Limited
HDFC Hybrid Equity Fund	1.0	HDFC Asset Management Company Limited
Canara Rob Equity Hybrid Fund	1.0	Canara Robeco Asset Management Company Limited
Aditya Birla SL Equity Hybrid ’95 Fund	1.0	Aditya Birla Sun Life AMC Limited
Tata Hybrid Equity Fund	1.0	Tata Asset Management Private Limited
Nippon India Equity Hybrid Fund	1.0	Nippon Life India Asset Management Limited
Quant Absolute Fund	1.0	Quant Money Managers Limited
Franklin India Equity Hybrid Fund	1.0	Franklin Templeton Asset Management (India) Private Limited

Best SWP Mutual Fund In India

The table below shows the Best SWP Mutual Fund In India based on Absolute 1-year return and AMC.

Name	AMC	Absolute Returns – 1Y %
ICICI Pru Equity & Debt Fund	ICICI Prudential Asset Management Company Limited	39.79
Quant Absolute Fund	Quant Money Managers Limited	39.19
Nippon India Equity Hybrid Fund	Nippon Life India Asset Management Limited	33.43
Franklin India Equity Hybrid Fund	Franklin Templeton Asset Management (India) Private Limited	32.67
Aditya Birla SL Equity Hybrid ’95 Fund	Aditya Birla Sun Life AMC Limited	29.25
Canara Rob Equity Hybrid Fund	Canara Robeco Asset Management Company Limited	27.88
SBI Equity Hybrid Fund	SBI Funds Management Limited	27.34
Tata Hybrid Equity Fund	Tata Asset Management Private Limited	26.43
HDFC Hybrid Equity Fund	HDFC Asset Management Company Limited	24.19
PGIM India Hybrid Equity Fund	PGIM India Asset Management Private Limited	22.69

Tax Calculation on Systematic Withdrawal Plans (SWPs)

Capital Gains Tax:

Long-Term Capital Gains (LTCG): For investments held longer than one year, gains are taxed at a lower rate. For equity mutual funds, this is typically 10% on gains exceeding ₹1,00,000 per year. For other assets, the rate may differ.

Short-Term Capital Gains (STCG): For investments held for one year or less, gains are taxed at higher rates. For equity mutual funds, this is generally 15%.

Dividend Distribution Tax (DDT):

SWPs usually involve withdrawing from the principal rather than receiving dividends. Thus, DDT may not apply directly to withdrawals but could affect the overall mutual fund distributions.

Tax Deducted at Source (TDS):

For certain investments like Fixed Deposits (FDs) or Debt Mutual Funds, TDS may apply if the withdrawal exceeds specific thresholds. TDS rates vary by investment type and tax status.

Tax on Interest Income:

Withdrawals from investments generating interest (e.g., FDs, Bonds) might include taxable interest. This interest is taxed according to the investor’s income tax slab.

Tax on Equity Mutual Funds:

LTCG: 10% on gains above ₹1,00,000 per year.

STCG: 15% if held for one year or less.

Note: Tax laws and rates may vary based on jurisdiction and individual circumstances. Consult a tax advisor for personalized guidance and accurate calculations based on your investment portfolio and tax situation.

Recurring Deposits (RDs) are a popular financial product offered by banks and non-banking financial companies (NBFCs). They enable individuals to save a fixed amount of money regularly, usually monthly, over a set period. The primary purpose is to foster disciplined savings by allowing smaller, regular deposits instead of a large lump sum. Tenure for RDs typically ranges from 6 months to 10 years, depending on the investor’s preference.

Systematic Withdrawal Plans (SWPs)