SWP: A smarter way to manage periodic expenses

Over the last few years, SIP has been the buzzword in Indian households. Increase in Average monthly SIPs from Rs 3,660 Cr in FY17 to Rs 16,359 Cr in FY24 (Up to Feb’24) bears testimony to this. While the benefits of wealth creation using SIPs are known widely now, the benefits of SWP (Systematic Withdrawal Plan) are not talked about enough. Simply speaking, SWP is the opposite of SIP and helps you withdraw a fixed amount from your Mutual Fund investments at periodic intervals.

How does it help?

Brings discipline to withdrawals, to meet regular expenses. Redemption of lower units at higher NAV and vice versa (As the amount of withdrawal is pre-determined and remains constant). This is Rupee cost averaging in reverse.

Who should use?

While SWPs can be used by anyone to meet regular expenses, it can be used by retirees, primarily to meet their regular expenses. This way retirees do not have to worry about initiating redemptions/ withdrawals to meet regular expenses.

How much should be the withdrawal rate?

• For individuals with no other source of income, monthly withdrawals using SWP is required to take care of regular expenses. Consequently, monthly expenses become a key factor in this puzzle to determine the rate of withdrawals
• While there is no one size fits all, a conservative withdrawal rate is in, order to give oneself a better chance of avoiding premature erosion of capital.
• Ultimately, how much rate of withdrawal is ideal, is a function of your monthly expenses, rate of inflation, investment corpus and also, the rate of the return on your portfolio. Now practically speaking, you cannot have complete control over any of these factors. What you could do though is, have a sustainable lifestyle so that your future expenses are manageable. You could plan for your retirement as early as possible to build a reasonably large corpus. Post-retirement, you could have the right asset class mix as per your risk appetite – not overly aggressive or conservative but an optimal one.
• Ideally speaking, one could factor in the potential return of the fund and reduce the inflation rate from it. For instance if the expected return from the fund is A% and the inflation rate is B%, then (A-B)% could be the SWP rate that one could target. This way, one could aim to preserve the real value of the portfolio (adjusted for inflation) and avoid the possibility of depleting the corpus sooner. Rate of returns on investment and rate of inflation can fluctuate significantly and could have a bearing on the outcome though.

Tax advantage of SWPs

When you redeem MF units using SWP, you are taxed only on capital gains arising from the redemption, and not the entire withdrawal. In contrast, for Fixed Deposits, entire interest income is taxable at marginal rate of tax, thereby making SWP more tax efficient as compared to Fixed income bearing instruments like FDs. Even IDCW (Income Distribution cum Capital Withdrawal) payouts are taxed in entirety at marginal rate of tax. Further, if you are withdrawing from an equity-oriented fund, for units held longer than 1 year, gains are treated as Long-term capital gains and allow for exemption of up to Rs 1 Lakhs in a particular FY

SWP vs IDCW

Apart from the tax advantage, SWP is also more reliable in terms of cash flows as compared to IDCW (Income Distribution cum Capital Withdrawal) payouts, which are not assured periodic cash flows and are subject to availability of distributable surplus.

All said and done, each individual may have unique financial circumstances and risk appetite. It is recommended to consult a financial advisor to determine the appropriate withdrawal using SWP.

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