Mutual Funds

Mutual Funds: What is systematic withdrawal plan and how does it work?

Systemic Investment Plan (SIP) is a well-known method of investing in a mutual fund, Systemic Withdrawal Plan (SWP), in comparison, is a little-known category. In general terms, SWP is the facility by which an investor can withdraw a pre-determined amount from his existing investments in mutual funds at a pre-decided interval – weekly, monthly, quarterly, semi-annually, or annually. 

In terms of its functioning, SWP is similar to SIP but it gives an option to withdraw systematically and helps investors in generating a regular cash flow.

For the benefit of beginners, SBI Mutual Fund has listed the following benefits of a Systematic Withdrawal Plan.

Tax benefits

In Systematic Withdrawal Plan (SWP), the tax is paid only on the gains made due to the Net Asset Value (NAV) movement and not on the principal part in the withdrawals making the overall tax incidence lesser. 

Unlike SWP, in traditional investment options the entire gain is taxed according to the investors’ tax bracket (the highest currently being 30 %) considering if the investor falls under the highest tax bracket.​

Regular supplemental income

The option of SWP in a mutual fund can help you by providing a steady source of income from your investments. This is especially useful for those who need money when their cash flow comes to a halt like a retirement, or at a time when supplemental income becomes a necessity due to the altered circumstances in life.

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Helps in meeting financial goals

If planned well ahead of time, SWPs can provide a steady flow of money when most needed. They can therefore be linked to long-term financial goals, such as providing a steady income in one’s retirement years or managing your child’s educational expenses.

Who can use SWP?

SWP can be utilized by those who are planning for their retirement in the coming years. Usually, the large amount of money that one receives at the time of retirement is invested in traditional savings instruments which attract income tax at the normal rates. 

Alternatively, they can make a lump sum investment in mutual funds with SWP facility. In this case, along with earning capital appreciation on the invested amount, one can receive a fixed amount monthly. It will help you in getting a regular income like salary even after retirement.​​

According to SBI Mutual Fund, the use of SWPs may not be restricted to retirees alone. It is also useful for middle-aged professionals who can use SWP option to get a constant source of fund for their dependents. They can plan it for their child’s educational expenses.

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