What is Systematic Withdrawal Plan & How Does It Work?

Just as SIP in mutual funds provides a structured way to invest regularly, there is also a structured way to withdraw money. This facility is called a Systematic Withdrawal Plan (SWP). It allows investors to withdraw a fixed amount at regular intervals while the remaining investment continues to stay invested in the mutual fund scheme.

In this article, we will explain what an SWP is, how it works, how units are redeemed, and what investors should consider before choosing SWP. 

What Is a Systematic Withdrawal Plan (SWP)?

A Systematic Withdrawal Plan (SWP) is a facility offered by mutual fund schemes that allows investors to withdraw money from their investment at regular intervals.

Instead of redeeming the entire investment at one time, withdrawals are made in a structured manner over a chosen period. The remaining invested amount continues to stay invested in the scheme. The value of the investment may increase or decrease depending on market movements.

How Does SWP Work?

The process of SWP is simple and structured.

Step 1: Choose the mutual fund scheme

You pick a mutual fund scheme where you want to keep your money invested (often debt, hybrid, or equity schemes depending on the goal and risk tolerance).

Step 2: Ensure you have an investment corpus in that scheme

You can start SWP only if you already hold units in that fund either by:

• investing a lump sum, or
• accumulating units over time via SIPs (subject to scheme rules).

Step 3: Set the SWP instructions

You select:

• Withdrawal amount (e.g., ₹10,000)
• Frequency (monthly/quarterly, etc.)
• Start date
• (Sometimes) end date or “until cancelled”

Step 4: On each SWP date, units are redeemed automatically

On the scheduled date, the fund processes a redemption to generate your chosen pay-out.

• The pay-out is converted into units redeemed × applicable NAV
• NAV is the price per unit on the applicable transaction date (as per cut-off rules)

What changes each time?

• If NAV is higher, fewer units are redeemed to pay the same amount
• If NAV is lower, more units are redeemed

Step 5: Money is credited to your bank account

After processing, the withdrawal amount is transferred to your registered bank account.

Step 6: Remaining units stay invested

The units left in your folio continue to remain invested and their value fluctuates with market performance.

Step 7: SWP continues until you stop it or units run out

The SWP typically continues:

• until you cancel/modify it, or
• until the available units are fully redeemed.

Step 8: Taxes (and exit load, if applicable) are applied like a redemption

Each SWP instalment is treated as a redemption transaction, so:

• capital gains tax may apply (depending on fund type + holding period), and
• exit load may apply if the scheme’s exit load conditions are triggered.

What are the Risks in SWP?

Before starting an SWP, investors should understand certain risks.

• Market risk
  Mutual fund investments are linked to market performance, so if markets fall, the value of the remaining investment may decline
• Capital reduction risk
  If the withdrawal amount is higher than the returns generated over time, the total investment value may reduce steadily
• NAV impact
  During periods of low NAV, more units are redeemed to meet the fixed withdrawal amount and this can reduce the number of units held
• Taxation
  Each withdrawal is treated as a redemption, Capital gains tax may apply depending on the type of fund and the holding period and tax rules are subject to change
• Exit load
  Some schemes may charge an exit load if units are redeemed within a specified period

Investors should review scheme documents carefully before opting for an SWP facility.

How Is SWP Taxed?

Each withdrawal under an SWP is treated as a redemption of units. It is not treated as interest or fixed income. When units are redeemed, capital gains tax may apply on the gains portion of the redeemed units.

The tax treatment depends on:

• The type of mutual fund (equity-oriented or debt-oriented)
• The holding period of the units being redeemed (Long term vs Short term)
• The applicable tax rules at the time of redemption

For equity-oriented funds, taxation differs based on whether units are held for short-term or long-term.

For debt-oriented funds, tax treatment is governed by prevailing income tax provisions.

Note: Tax laws are subject to change, refer to the latest tax rules or consult a qualified tax professional before making decisions.

When Is SWP Commonly Used?

An SWP is often used when investors want regular withdrawals from their mutual fund investments.

For example:

• Retirees may use SWP to receive periodic income from their accumulated investments (senior citizens)
• Some investors may use it to withdraw money gradually instead of redeeming the entire amount at once
• It may also be used when investors need funds at regular intervals for a specific financial requirement or planned expense
• Some investors may use SWP as part of their tax planning approach. Since each withdrawal is treated as a redemption, capital gains tax applies only on the gain portion of the units redeemed at that time, as per applicable tax rules

The suitability of SWP depends on individual financial needs, risk tolerance, and tax considerations.

SIP and SWP in Mutual Funds: What’s the Difference?

Systematic Investment Plan (SIP) and SWP are different methods offered by mutual funds.