What is an SWP?
SWP is a tool used to withdraw a fixed amount, typically every month, on a fixed date. Anyone with lump sum investments in a mutual fund scheme can use this tool to withdraw money at regular intervals. Suppose you have invested `2 lakh in an equity mutual fund scheme and opt to withdraw `1,000 per month. SWP ensures you get `1,000 per month and the balance amount in the scheme keeps growing in line with the markets. Many retired individuals and senior citizens use this money to meet monthly expenses.
Why are investors increasingly choosing SWPs instead of the dividend option in mutual funds?
SWP is a far more reliable tool for regular income compared to dividends, say financial planners. In the dividend plan of an equity fund, both the amount and frequency of the dividend are not guaranteed, and it largely depends on market movements and the profits the asset management company earns. SWP works better than mutual fund dividends for regular income as it brings stability.
How are SWPs tax-efficient ?
SWP is the redemption of units from the scheme. Hence, the tax treatment of each withdrawal will be the same as that for equity-oriented funds. For units held for more than a year, a long-term capital gains tax of 10% will be applicable for gains of over `1 lakh, while for a holding period of less than a year, it is 15%. Long-term capital gains of up to `1 lakh in a financial year are tax-free. In comparison, when you opt for a dividend payout in a mutual fund scheme, there is a tax on the dividend paid in line with your tax slab, which could go up to 30% for rich investors. If the dividend exceeds `5,000 in a year, the fund house deducts 10% TDS.
How does one start an SWP? Can it be stopped anytime?
Investors generally use the growth option of an equity-oriented or hybrid scheme to start an SWP. Financial planners advise investors to avoid narrow thematic and sectoral funds. You can start it at the time of investing in a scheme. If you are already invested, then you can activate the SWP option. All you need to do is fill out an instruction slip with the fund house stating the folio number, the withdrawal frequency, the date for the first withdrawal, and the bank account to credit the proceeds. Similarly, you can stop it anytime and don’t need to pay any charges for stopping SWP or changing the withdrawal amount.
