Celebrating Life with Systematic Withdrawal Plans (SWP)

As accumulation of wealth is important so is its distribution. A lot is said about the accumulation phase, however, the distribution phase is also equally important and you should have a well thought strategy that will help your wealth last longer.



Rahul Patel
Founder, Aalps Investment Advisory 

Most of our financial decisions are focused towards accumulating more and more wealth, but in the process, we don’t realize that all accumulation and no utilization is indeed not worth it. Just as important role the accumulation of wealth plays towards your financial health, equally important is the utilization of wealth to celebrate the special phases of life.

One may be spending the entire working life towards wealth creation, and in the later stages of life, especially when the regular sources of income dry up, it is the wealth corpus that comes into picture. However, spending the entire corpus in an unplanned manner can result in the corpus finishing away faster than it should. 

Similarly, the lumpsum withdrawal of the investment corpus at the time of retirement and investing it in the traditional investment avenues can be another big mistake impacting the financial health in a significant manner, especially considering the quantum of the retirement corpus. The investment corpus should ideally be kept invested till the time of actual utilization, so that it continues to grow further by working harder and yielding smarter.

As such, a systematic withdrawal of the wealth so created becomes imperative for a better financial health. Systematic Withdrawal Plan (SWP) facility offered by Mutual Funds helps you to do precisely the same. SWP allows the investors to redeem a fixed sum of money periodically at the prevailing Net Asset Value (NAV) of the scheme. The periodicity of such withdrawal can be monthly, quarterly, half-yearly or as opted by the investor. 

If the redemptions are to be triggered at the will of the investor, the timing of such redemptions may assume importance at the back of the mind. This may be due to the fact that when the funds are required, the markets may be lower on that particular day and hence, the emotional investing prevents us to redeem the funds on that very day. SWP helps the investor to eliminate such timing bias at the time of regular withdrawals, since the redemptions are made automatically on a periodical basis. Further, since the withdrawals are made over a period of time and not at one go, the redemption price also gets averaged over time and you are not left repenting on a single instance of redemption at lower levels. 



SWP is also beneficial to the investors in terms of providing a sense of flexibility as well as certainty for periodical cash flows, as the investor himself fixes the amount of SWP at the time of registration. The quantum can be decided by the investor considering the monthly cash flow requirements, as well as the corpus available.

Withdrawals through SWP are treated as regular redemptions in terms of taxation and hence, the investors can plan for making such redemptions tax-efficient for them. As per the Income Tax Act 1961, gains arising from equity mutual funds where the money has stayed invested for more than 12 months are taxable at 10% (plus applicable cess and surcharge). However, to protect the interest of small investors, long term capital gains as discussed above are exempt for investors upto Rs. 1 lakh a year. As such, redemptions made through SWP turn out to be tax-efficient as the withdrawals can be planned to utilise in a manner to be able to avail the Rs. 1 lakh annual exemption limit available.

In addition to this, the amount invested in equity needs a long term attitude and it has always been a debatable question in terms of what long term defines in number of years. If we check the average returns of diversified mutual funds in India for the last 15 years from now (Dec 2018), these are about 17% CAGR, while the best mutual funds have given 27% and worst mutual funds have given nearly 13% CAGR returns. 

Ideally, if you do 10% SWP after giving sufficient time to your investments, then it shall help you to get regular inflow from your investments along with growth in your existing fund value. 

The tax-efficiency of the withdrawals through SWP also got established when a sample data was plotted for one of the mutual fund schemes and the impact of new tax provision for LTCG on equity mutual funds was tested for the same:


The writer is a founder of Aalps Investment Advisory Email: info@aalpsinvest.com  Website: www.aalpsinvest.com