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Last Updated : Oct 05, 2015 10:57 AM IST | Source: Moneycontrol.com

How to make most of mutual fund systematic withdrawal plan

Systematic withdrawal plan can help you take home a fixed sum of money in a tax efficient manner.

Rohit Shah

Systematic Withdrawal Plan (SWP) allows one to automate regular withdrawals from mutual funds (MFs). Like Systematic investment plan (SIP), SWP too can be a great tool. This can also be used by families to manage a part of their post retirement withdrawals from the corpus. Thus one can leverage SWP as a tool to manage investments, save on taxes, avoid exit loads and save efforts. All the more, it supports the strategic efforts to achieve ones goals.

How this works?

When SWP is setup, the mutual fund company simply liquidates mandated number of units or a fixed amount and transfers the proceeds to investor’s bank account on a specified day with a chosen frequency.

Post retirement:

One of the biggest challenges post-retirement is to save on taxes and to beat inflation. One gets in defensive gear and prefers safer investments. These limit the returns and results in tax inefficiencies. One way to improve the situation here is to fully fund for say first 5-7 years of retirement need through fixed income instruments and simultaneously invest in equity mutual funds. The part of the withdrawal needs at a later stage, say from year five, can be managed through SWP from equity mutual funds corpus. In the long run, this can do wonders by saving taxes and beating inflation.

Averaging out:

Spreading withdrawals through SWP over a period of time may be helpful during volatile markets. The redemption price can be averaged out over say 6-12 months. There is always this question of timing, be it investment or withdrawal that bothers investors. Using tools like SWP helps to smoothen out fluctuations in the short term.

ELSS investing:

When one has invested in an ELSS fund through SIP and needs to now move out, he faces a trouble. Every installment of earlier investment will have three years lock-in. Using SWP in such cases will ensure that one can just set this up and be done with it. Similarly, withdrawals from investments under lock in can be easily managed using SWP. When one wants to re-use the capital in ELSS after lock in of three years, to save tax again this year, the SWP can be useful to withdraw, get the money in the bank account and re-invest in another ELSS scheme. Caution is needed here as one should balance between churning the funds and efficient re-use of capital. Also this should be done only when you are running short of funds. This is not an ideal situation and one should use his tax saving investments to achieve financial goals.

Ease of transacting:

SWP facilitates lot of convenience. Multiple transactions over a period can be setup through a single SWP. The mutual fund companies do not charge for such services. This saves transaction costs and monitoring. More importantly, it helps one to achieve strategic objectives. For example, one knows how much money he wants to maintain his lifestyle per month. If one wants Rs 40000 per month and he gets Rs 35000 from other sources such as pension and interest, he can set up an SWP of Rs 5000 from his mutual funds.


If a retired person, in 30% tax slab, has invested his money in debt mutual funds, he can use SWP to boost his post tax-returns. He should invest in growth option of debt funds. After three years, he should start withdrawing money. Such withdrawals will be treated as long term capital gain and will be taxed at 20% rate of tax post indexation. If he goes for a dividend option, all dividends will attract tax at the rate of approximately 28%. By opting for SWP in growth option not only, the investor gets to reduce the tax liability, but also can fix the amount of money he needs per month. As dividends are not guaranteed, there is always an element of uncertainty on the quantum of money he receives per month.

Rohit is certified financial planner and SEBI registered investment advisor. Rohit has founded Getting You Rich, a financial planning firm.
First Published on Oct 5, 2015 10:57 am