Systematic Withdrawal Plan - SWP is simply the reverse of SIP. SWP allows an investor to withdraw a designated sum of money and units from the fund account at pre-defined regular intervals. It allows investors a certain level of independence from market instability and helps in avoiding market timing. The investor can reinvest the redeemed cash in another portfolio or use it as a source of regular income.
Usually used :-
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for regular income - SWP helps in creating a regular flow of money from investments on a periodic basis i.e. on a monthly or quarterly basis.
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for tax benefit - Instead of selling all the units at once, spanning the income across multiple intervals can lower the total tax. It is a tax efficient way of receiving regular income.
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to avoid market fluctuations - It saves an investor from market fluctuations, as regular withdrawal averages out return value.
Taxation and other aspects:-
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Firstly, you cannot run an SIP and SWP in the same fund.
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Second, inflation is likely to increase the monthly withdrawal amount each year to meet expenses.
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The third is that there will be fluctuations in the inflation rate as well as the portfolio return which can considerably impact the portfolio.
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The fourth is taxation. Since an 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 full withdrawal of equity and debt funds. Hence, for units where the period of holding has not crossed 12 months for equity funds, there might be a short term capital gains tax.For debt funds, there will be a tax liability (short-term capital gains on holding for less than 36 months and long-term capital gains on longer holding periods)which need to be factored in. You also need to be mindful of the exit load of the scheme before activating the SWP on that folio.
