Systematic Withdrawal Plan (SWP) better than traditional investment option.

In the basket of financial tools, there is an option which provides fixed income per month by following the simple approach of Systematic Withdrawal Plan (SWP). SWP is a process of redeeming money from your mutual fund investment in a periodic manner. This ensures that a fixed amount is credited to your bank account on a fixed date periodically, just like salary income. This investment option is better than the traditional investment options like fixed deposit.

Here the benefits of investing through SWP.

Rupee cost averaging

Rupee cost averaging is one of the key benefits of the SWP. Due to this the investor even benefits when he withdraws the money from its investment. To understand this let us assume that Mr. A has invested Rs. 5 lakhs in a scheme with NAV of Rs. 50 and opted for the SWP of Rs. 10,000 every month. With the changing market dynamics the NAV for the scheme changes every month, after 5 month he has withdrawn Rs. 50,000 in total. (Rs. 10,000 each month). So the principle amount is reduced to 4.5 lakhs, however the value of investment will be higher. See table below

In short, due to rupee-cost averaging under SWP, investor will turn benefit even while withdrawal. Therefore, you earn even as you keep on withdrawing funds.

Tax efficiency

The SWP option is an tax-efficient option rather than the traditional investment option like fixed deposit. However, after imposition of LTCG on equities by GOI recently it attracts 10 per cent LTCG tax on gains above Rs. 1 lakh. On the other hand, the short-term capital gain tax (STCG) is 15 per cent on the profits which are booked before one year. Hence when an investor withdraws through SWP the tax liability reduces to great extent as he has to pay tax only on the gains and after one year it further reduces as now he has to pay tax at lower rate of 10 per cent.

Fixed Income

SWP’s are beneficial than traditional investment options as it provides definite inflow of cash monthly that is it assures a fixed income per month and earns returns more than the traditional investment option with the tax efficiency.

So smart investors should opt for SWP rather than the traditional investment option to secure higher returns and to reduce the tax liability. Going ahead for the risk averse investor it is advisable to park the money in the liquid funds or short-term debt funds instead of equity funds to avoid capital erosion with the volatility in the market.