What is SWP in Mutual Fund? Meaning, Working & Benefits of SWP Investment

While many people withdraw money from a mutual fund by just selling off their units in bulk or fragments, a SWP facility offered by mutual fund can be a better way to plan your mutual fund withdrawals; here is why you should think about a SWP facility:

Automated Withdrawals: You can issue standing instructions to your mutual fund and bank to transfer the pre-determined SWP into your bank account at a particular date each month/quarter.

Book profits systematically: After years of investment, you should reap the benefits of your long-term investment in equity mutual funds systematically. SWPs allow you to gradually withdraw from the funds, while the non-withdrawn corpus can still earn market linked returns.

Solution to many financial needs: SWPs address a number of financial needs for investors. They can be used to create a regular additional stream of income for investors which can be used for children's education, rent, regular medical expenses or just for supporting regular expenses. SWPs are also an ideal choice for funding regular income during retirement years.

In order to start a SWP, you usually need to fill a SWP form or you can make your SWP application online on the mutual fund’s website.There are two options for SWPs:

Fixed Periodic Withdrawal: This allows you to withdraw a fixed sum at regular intervals. On the fixed date, units equivalent to SWP amount are redeemed and the money is transferred to your bank account.

Appreciation Withdrawal: In this SWP, only the appreciation on the fund or gains are withdrawn. You can specify withdrawal frequency of the fund; as an example, if you invested Rs. 20 lakh in a mutual fund and it appreciates by 1.5% each month, if you choose a monthly SWP, you could get a credit of Rs.30,000 from your fund each month in your bank account.

Benefits of SWP

You now have a good understanding of what is SWP in mutual funds. In addition to SWP meaning in mutual funds, you have also seen why an individual should consider using SWP for their financial planning. Now, SWP in mutual fund means a Systematic Withdrawal Plan. So, you know what is SWP, but what are the benefits of SWP? Let us take a look –

One of the primary benefits of SWP is its ability to provide a steady stream of income. Investors can specify the amount and frequency of withdrawals, allowing them to customise their cash flow to meet various needs like monthly expenses, funding education, or retirement planning. This predictability can offer a sense of financial security, especially during market fluctuations. In addition to understanding what is SWP in mutual fund, you should also know that SWP offers an automatic rebalancing feature. As an investor withdraws a fixed amount, the investment balance naturally decreases over time. This prompts a shift in the portfolio's allocation, helping to maintain a balanced mix of assets. Consequently, SWP in mutual fund means assistance in avoiding portfolio drift and aligning with the investor's risk tolerance.

When someone asks you what is SWP and what are its benefits, you can also mention how SWP is an excellent tool for managing market volatility. By withdrawing a fixed amount regularly, investors are less impacted by short-term market fluctuations. This can help reduce emotional decision-making based on market turbulence, allowing investors to stay focused on their long-term financial objectives.

To further solidify SWP meaning in mutual fund, and its varied benefits, you should know that SWP can be particularly beneficial for investors in higher tax brackets as it potentially lowers their overall tax burden. We will discuss this further in the next segment. Finally, the question of what is SWP in mutual fund and what are its benefits brings up the point of disciplined spending. Since investors decide on a predetermined withdrawal amount, they are less likely to overspend or deplete their investment prematurely, thus ensuring that spending complements prudent financial planning and helps safeguard assets for the future.

A big reason to use SWP is its tax efficiency. Taxes are not deducted at source on a SWP like some other investments. Taxes are only applicable on the withdrawn or redeemed units in the case of a mutual fund SWP. Here are the applicable taxes on both equity and debt SWPs: