Systematic Withdrawal Plan

How does a SWP work?

Understanding how SWP works is quite simple. The process to set up a Systematic Withdrawal Plan, which is the SWP full form, is direct. You instruct your preferred mutual fund house or stock broker to start the SWP for your investments from a chosen date. You will also need to specify the withdrawal amount and the frequency. Thereafter, the corpus you have built will be withdrawn systematically as per your instructions and credited to the bank account you have provided.

To better understand how does SWP work, let us consider an example. Suppose you have a total investment of ₹5 lakhs in mutual funds, which is divided into 25,000 units of ₹20 each. You decide to redeem ₹4,000 per month. Here is how your SWP will work out during the next six months. For detailed calculations tailored to your investment, an ​​SWP calculator can be a useful tool.

Key features of a Systematic Withdrawal Plan (SWP)

Before starting an SWP, it is important to know its main characteristics. The core SWP meaning is centered on its organized method for creating cash flow from your investments. A few key features make this possible:

• Regular Withdrawals: The design of an SWP plan provides payouts at set intervals, which gives the investor a reliable income source.
• Flexibility: An investor determines the withdrawal amount and frequency, and they can also adjust the plan's duration to fit their financial needs.
• Compounding Advantage: Not all of your units are sold at once. The money remaining in the fund stays invested, so it can benefit from a compounding SWP return rate over time.
• Disciplined Strategy: SWP provides a structured method for withdrawals, giving you more effective fund management and preventing a fast depletion of your investment.
• Rupee-Cost Averaging: Withdrawing funds regularly helps to average the cost of your investments, a process that lessens the impact of market fluctuations as time goes on.

How to do an SWP?

Now that you have understood what is SWP, you can set one up to obtain a steady income stream from your mutual fund investments. Wondering how to invest in SWP? Here is the process:

• Choose a mutual fund scheme: Your selected mutual fund must align with your financial goals and risk tolerance. Crucially, you must ensure the fund you choose actually permits SWP facilities.
• Make an initial investment: You must invest a lump sum amount in the chosen mutual fund. This initial investment will serve as the source capital for your systematic withdrawals.
• Submit an SWP request: You will receive an application form from the mutual fund house. In this form, you must state the withdrawal amount, the frequency, and the start date. Also provide the bank account details for the funds to be credited.
• Understand tax implications: Most withdrawals have tax consequences. The fund type you chose, whether equity or debt, and the investment's duration are what determine your final tax liability.
• Monitor your investment: You must monitor the fund's performance and remaining balance. This regular check is critical to keeping the plan aligned with your long-term financial goals.

Advantages of a Systematic Withdrawal Plan

If you are still weighing your options between a lump sum withdrawal and an SWP, it is time to look at the clear advantages of a systematic plan. Understanding what is SWP is only the first step. The real power is in the SWP benefits, which help you make an informed and strategic choice for your financial future.

Suitable in a Bull Market

When the market is performing well, an SWP is an ideal tool. You can capitalize on upward price movements because you are only redeeming a small part of your corpus at any given time. The mutual fund units that have not yet been redeemed remain invested. This allows them to continue accumulating and appreciating throughout the bull run.

Supports Disciplined Withdrawals

Choosing to withdraw small sums periodically builds investment discipline. It is a powerful defense against impulsive lump sum withdrawals. This structure prevents you from spending your entire capital in one go. Because you only have access to your funds in small, planned amounts, you will naturally use the money more prudently.

Gives You a Predictable Income

An SWP gives you access to a steady, predictable stream of income. If you are still working, this can act as a valuable supplementary income. In retirement, it can replace a part of your primary income completely. All the while, your unredeemed mutual fund investments have the potential to continue growing based on market movements.

It Helps Avoid Timing the Market

If you choose to make a lump sum withdrawal, you must study the market and attempt to pinpoint the perfect time to exit. This is incredibly difficult. If the market rises after your mutual fund redemption, you will suffer from seller's remorse. Timing the market is a tricky and challenging game. By choosing an SWP instead, you avoid all of this hassle.

The Benefit of Rupee Cost Averaging

Rupee cost averaging is a key investment strategy that is highly relevant to Systematic Withdrawal Plans. The approach involves redeeming a fixed amount at regular intervals, no matter what the market is doing. The main benefit is its ability to mitigate the impact of market volatility. By redeeming a fixed amount regularly, you are likely to sell your units at various price points, both high and low. This strategy helps in averaging out the sale price, which can lead to a higher overall average price per unit during favorable market phases.

Tax Benefits

When you redeem your mutual fund holdings via a SWP, you may earn capital gains on the redemption. These capital gains are taxed based on the type of mutual fund redeemed and its period of holding. w.e.f. July 23, 2024, the classification of mutual fund profits as long-term or short-term capital gains and the taxation rules involved are as follows:

Taxation for SWP

The taxation on your Systematic Withdrawal Plan in India follows specific rules. Two data points determine your tax liability: the kind of mutual fund you own and your holding period. The tax applies strictly to capital gains. Your principal withdrawal is exempt. Tax laws are subject to change. Always consult a tax professional for tailored guidance.

Key Things to Remember:

• Tax on Gains: The government only taxes your capital gains. The principal amount from your SWP withdrawal is not taxed. A ₹12,000 withdrawal with ₹8,000 of principal means you only pay tax on the ₹4,000 gain.
• No TDS: There is no Tax Deducted at Source on SWP withdrawals.
• Capital Loss Set-Off: Short-term capital losses offer flexibility. You can set them off against short-term or long-term capital gains. The rule for long-term capital losses is more restrictive. They only offset long-term capital gains. You are allowed to carry these losses forward for eight years.
• Surcharge and Cess: Your final tax rate will also include a surcharge tied to your income level and a 4% health and education cess.
• Pre-July 2024 Debt Funds: Investments made before July 23, 2024, had a different rule; long-term capital gains (held over 3 years) in debt funds were taxed at 20% and received indexation benefits. That rule is gone for all new investments.

SIP VS SWP

Although Systematic Investment Plans (SIPs) and Systematic Withdrawal Plans (SWPs) are both disciplined, rule-based methods for transacting in mutual funds, they serve opposite purposes. An SIP is a facility for building wealth through regular investments, while an SWP is a facility for creating a steady income stream from a corpus that has already been built.

This comparison breaks down their key features:

Formula to Calculate Systematic Withdrawal Plan (SWP returns)

You can estimate the future value of the withdrawals from an SWP using the formula below:

A = PMT ((1+r/n)^nt-1)/(r/n))

Where:

A = Future value of all withdrawals

PMT = Withdrawal amount per period

r = Expected rate of return (as a decimal)

n = Compounding frequency

t = Investment duration in years

To find the final balance of your investment, you must calculate the future value of your initial investment and then subtract the future value of your withdrawals.

Example Calculation

Consider an SWP with the following parameters:

• Initial Investment = ₹8,00,000
• Duration = 7 years
• Monthly Withdrawal = ₹7,000
• Expected Annual Return = 9%

The calculation for the final value would be as follows:

• Future Value of Investment = ₹8,00,000 * (1 + 0.09/12)^(84) = ₹15,00,845
• Future Value of Withdrawals = ₹7,000 * [((1 + 0.09/12)^(84) - 1) / (0.09/12)] = ₹8,01,659
• Final Remaining Value = ₹15,00,845 - ₹8,01,659 = ₹6,99,186

The summary of the results is:

• Total Withdrawals = ₹5,88,000 (₹7,000 x 84 months)
• Final Value = ₹6,99,186

This final value represents the remaining investment balance after seven years, assuming a consistent 9% annual return.

Why Investors May Opt For SWP in a Rising Market

In a growing market, many investors want to lock in profits by selling their mutual fund units. The problem with selling a large portion at once is that it can limit your long-term capital appreciation. A Systematic Withdrawal Plan (SWP) provides a smarter way to manage this situation, allowing you to realize some gains while maintaining a regular income. For those wondering what is systematic withdrawal plan, this is one of its key advantages.

When markets are climbing, the value of your fund units goes up. Selling too many units at once to cash in on profits can be a mistake, as it depletes your capital and hurts future earnings. An SWP uses controlled withdrawals, so a large part of your investment stays in the market to take advantage of continued growth.

A lump-sum sale also puts you at risk of poor market timing. An SWP avoids this by spreading your withdrawals out over time. This method allows you to sell at different price points, which increases your chances of getting a better average return and reduces the risk of selling everything at a bad time.

Even strong bull markets have temporary dips. If you sell a lump sum during one of these downturns, you could lock in significant losses. An SWP helps manage this risk because the distributed withdrawals give your portfolio a chance to recover when the market swings back up.

For any SWP to be sustainable, it must be based on the right investments. A sustainable SWP requires quality mutual fund schemes that can generate returns that exceed inflation. The choice should always be based on your personal risk tolerance, investment horizon, and financial goals.

How To Effectively Plan Your SWP

A steady income from a Systematic Withdrawal Plan (SWP) demands a significant initial corpus. That corpus must then be invested in a financial instrument matching your risk profile. The withdrawal plan itself requires careful structuring to make your funds last for as long as you need them.

This planning process requires you to understand the balance between the monthly withdrawal and the plan’s duration. Consider the following example.

Assuming you have a ₹1,00,00,000 corpus and expect a 6% annual return:

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• ​A 20-year tenure with a ₹70,000 monthly withdrawal would result in a final remaining balance of approximately ₹3,30,650.
• However, a higher monthly income of ₹83,000 would require adjusting the tenure. Over a shorter 15-year tenure, the final balance would be approximately ₹1,51,894.

This example shows how changing your monthly withdrawal amount has a direct impact on the longevity of your corpus and the final balance that remains.

Should You Opt For a SWP?

A Systematic Withdrawal Plan may not be suitable for all investors. However, it may be a good choice for you if you:

• Need a regular and predictable stream of income from your investments.
• Want to manage market risks by using regular, periodic withdrawals.
• Want to maintain some exposure to the market while also withdrawing a part of your corpus.
• Seek greater flexibility in how you manage your investment withdrawals.
• Want a seamless transition from the investment phase to the redemption phase.
• Want to continue benefiting from potential growth during a bull market.

Tips Before Starting Your SWP Journey

Before you start a Systematic Withdrawal Plan, it is important to assess your financial needs carefully. Specifically, you should consider factors like inflation and your need for an emergency fund. As a general tip, do not base your decision solely on how well an investment has performed in the past. It is more important to pay attention to current market conditions that could impact your future returns.

Additionally, consider whether you should choose the growth or dividend options for your investments. This choice affects how much money you make and the taxes you pay, so it is a crucial part of understanding what is SWP in mutual fund. By picking the right option based on your financial situation and tax obligations, you can maximize your returns from the SWP.

SWP with Life Insurance

The concept of a Systematic Withdrawal Plan (SWP) can also be applied to ​​life insurance products such as Unit-Linked Insurance Plans (ULIPs) or other investment-linked policies. These policies not only provide life cover but also allow policyholders to build wealth through investment funds. By integrating an SWP-like feature, these plans enable you to access your accumulated funds periodically, offering a dual benefit of financial security and liquidity.

You can select life insurance plans from Kotak Life that complement a Systematic Withdrawal Plan. Kotak Life policies offer flexibility and financial security while aligning with your long-term financial goals. Some of the popular life insurance plans that work well with SWPs are:

• Unit-Linked Insurance Plans (ULIPs)

Kotak Life Insurance offers a range of ​​ULIPs that allow partial withdrawals after a lock-in period, mimicking an SWP structure. These features provide policyholders with financial flexibility while ensuring the dual benefit of life cover and wealth creation.

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​For instance, Kotak e-Invest Plus enables policyholders to invest in various fund options while offering the ability to withdraw funds systematically after a specified period. Similarly, Kotak Life’s other savings and ​​investment plans are designed to cater to your evolving financial needs with features like partial withdrawals, tax benefits and guaranteed returns.

• Endowment Plans

Endowment plans are traditional life insurance policies that offer both insurance and savings benefits. While they may not provide the same investment flexibility as ULIPs, you can still withdraw the accumulated sum over time using an SWP-like approach.

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​Kotak Saving Plans, such as the Kotak Guaranteed Fortune Builder offer a combination of life cover and savings benefits, ensuring financial stability for you and your loved ones.

Conclusion

A Systematic Withdrawal Plan, whether in mutual funds or integrated with life insurance, is an excellent strategy for achieving both liquidity and financial growth. By choosing a life insurance plan with SWP-like features, you can enjoy the peace of mind that comes with financial stability, wealth preservation and life cover—all tailored to your goals.

To explore life insurance plans that combine the benefits of SWP with comprehensive financial protection, connect with our experts or visit www.kotaklife.com. Start planning today to secure a steady income stream and a brighter future for your family!