Systematic Withdrawal Plans (SWPs) allow investors to withdraw a fixed amount of money at periodic intervals unlike a lump sum redemption from a mutual fund scheme. It can be seen as a reverse of Systematic Investment Plans (SIPs) and serves a regular income with its planned outflow of money.
Benefits of SWP
1. Regular Income
It can be a steady source of supplemental income and can be helpful in times of crisis such as unemployment, delayed salaries or so. It is usually a good substitute for pension post retirement when cash flow comes to halt or an additional income apart from the salary, in present day
2. Tax Efficient
It is tax efficient as the tax is paid only on the gains made by the investors and not on the actual principal. SWPs are looked upon as redemption plans rather than investment schemes. The taxation norms depend on the kind of mutual funds and investment duration. In case of Equity Funds, long term capital gains are exempted and short term profits are taxed at 15% on withdrawals within one year. In case of Debt Funds, long term gains are taxed at 20% with indexation and short term ones are added to the investors’ income and taxed as per their tax slab
3. Customised Cash Flow
The withdrawal amount can be customised. It can be a fixed amount or a variable. It can be monthly, quarterly, bi-annually or annually. It can either be Fixed Withdrawal Plan in which the investor sells off certain units equivalent to the SWP amount and the money is transferred to his/her account or s/he can go for Appreciation Withdrawal, in which the capital appreciation earned over the units (purchased from principal amount) is transferred to the account
4. Meet Financial Goals
If an investor chooses to invest in some mutual fund scheme and adopt a Systematic Withdrawal Plan, the regular cash flow can help realize certain financial goals. This money is an add-on other than the main income of a self/employed person. It can also help in dealing with market fluctuation as when funds fail to perform, dividends are zero. SWP is a boon then. Also, the money withdrawn can be reinvested in some other MF plan
Note: Rupee averaging cost works in favour of the investor in case of SWPs as well. Lesser units are redeemed to meet the required cash when markets favour and more when markets are down.
Best Systematic Withdrawal Plans
SWP is suitable for low risk funds like Liquid Funds, Ultra Short Duration Funds (USDFs) and other Debt Funds in contrast to SIP usually suggested for Equity Funds. Large Cap Equity Funds can be considered for SWP.
Best Large Cap Funds for SWP
| Fund Name | 3 Year Returns (%) | 5 Year Returns (%) |
| Axis Bluechip Direct Fund | 8.98 | 7.19 |
| Canara Robeco Bluechip Equity Fund | 3.96 | 4.93 |
| Mirae Asset Large Cap Fund | 0.02 | 4.57 |
| Motilal Oswal Focused 25 Fund | 1.10 | 4.10 |
| JM Core 11 Fund | -2.21 | 3.97 |
(Source: Value Research, as on April1, 2020. Based on Best 5 Year Returns)
Best Liquid Funds for SWP
| Fund Name | 1 Year Returns (%) |
| Quant Liquid Fund | 7.00 |
| Franklin Liquid Direct Fund | 6,60 |
| BNP Paribas Liquid Fund | 6.44 |
| Edelweiss Liquid Fund | 6.42 |
| Baroda Liquid Fund | 6.40 |
(Source: Value Research, as on April1, 2020. Based on Best 1 Year Returns as Liquid Funds are good for Short Term)
Best Ultra Short Duration Funds for SWP
| Fund Name | 1 Year Returns (%) | 3 Year Returns (%) |
| PGIM India Ultra Short Term Direct Fund | 13.32 | 9.57 |
| ICICI Pru Ultra Short Term Fund | 8.48 | 8.14 |
| ABSL Savings Direct Fund | 7.82 | 7.78 |
| IDFC Ultra ST Direct Fund | 7.56 | – |
| Kotak Savings Fund | 7.53 | 7.61 |
(Source: Value Research, as on April1, 2020. Based on Best 1 Year Returns, 3 Year investment is counted as Long Term Investment and taxed as one)