If you are those who like to listen to radio and are in Delhi NCR, then you couldn’t have missed advertisements on Systematic Withdrawal Plan (SWP). In one of the advertisements, Mr. Guptaji (a retired person) is shown enjoying life post retirement since he gets monthly income by SWP in Mutual Funds.
Though one might get an impression that SWP is the new kid on the block but that’s not true. It is the first cousin of SIP (systematic investment plan) though not loved like him and we will see the reason down in the post. But let’s start with the basics.

What is SWP in Mutual Funds?
SWP allows an investor to withdraw a fixed amount of money at pre-determined interval of time be it monthly, quarterly or annually. Hence it quite opposite of SIP (Systematic Investment Plan) where an investor puts in a fixed amount at fixed interval of time to build wealth. It helps the investor to manage cash flows. Most common use of systematic withdrawal plan feature is meeting of monthly expenses by retired people.
How Does SWP in mutual funds work?
Let’s take an example to understand how SWP in mutual funds works.
Mr. Guptaji (as mentioned above) has 20000 units of a mutual fund and present NAV of the fund is say Rs. 10. He has set up a withdrawal of Rs. 10,000 every month.
First Month
Withdrawal: Rs. 10,000
Month NAV (Assumption): Rs. 10
Units withdrawn: 10000/10 = 1000
Remaining Units Left: 19000 (20000-1000)
Remaining Amount in MF: Rs. 190,000
Total Money withdrawn: Rs. 10,000
Second Month
Withdrawal: Rs. 10,000
Month NAV (Assumption): Rs. 10.3
Units withdrawn: 10000/10.3 = 970.87
Remaining Units Left: 18029.13 (19000-970.87)
Remaining Amount in MF: Rs. 185,700
Total Money withdrawn: Rs. 20,000
Third Month
Withdrawal: Rs. 10,000
Month NAV (Assumption): Rs. 10.7
Units withdrawn: 10000/10.7 = 934.57
Remaining Units Left: 17094.56 (18029.13-934.57)
Remaining Amount in MF: Rs. 182,911
Total Money withdrawn: Rs. 30,000
Fourth Month
Withdrawal: Rs. 10,000
Month NAV (Assumption): Rs. 9.8
Units withdrawn: 10000/9.8 = 1020.4
Remaining Units Left: 16074.16 (17094.56-1020.4)
Remaining Amount in MF: Rs. 157,526.76
Total Money withdrawn: Rs. 40,000
Fifth Month
Withdrawal: Rs. 10,000
Month NAV (Assumption): Rs. 10.6
Units withdrawn: 10000/10.6 = 943.39
Remaining Units Left: 15130.77(16074.16-943.39)
Remaining Amount in MF: Rs. 160,386.1
Total Money withdrawn: Rs. 50,000
There are couple of important points to observe in above maths.
- First is how even after withdrawing Rs. 30,000 in first 3 months, Guptaji is still left with Rs. 182,911 in mutual funds. Ideally this should have been Rs. 170,000. This happened because NAV of the fund increased from Rs. 10 to Rs. 10.7 in these 3 months. Therefore SWP in mutual funds works well when NAV of the fund is growing. This point gets substantiated even more by looking at the numbers of 4th month.
- Second and more important point is if the periodic return from mutual funds is greater than the withdrawal rate, then the corpus wouldn’t reduce and Guptaji would be able to do good with this tactic throughout his life. Let’s look at the above statement in detail by talking numbers. In Fifth month, NAV jumps from Rs. 9.8 to Rs. 10.6 thereby giving monthly return of 8.1%. Withdrawal rate is 5.8%. That’s why you see that even after withdrawing Rs. 10,000 from the initial corpus, wealth grew from month 4 to month 5.
Now once basics of SWP in mutual funds are clear, let’s move on to some advanced things. Let’s talk about taxation now.
Taxation of SWP in Mutual Funds
SWP is taxed as per capital gain tax rules. Here are capital gain taxes for equities and debt.
Equity | Debt | |
Holding Period for Long Term Capital Gains Tax | More than 1 Year | More than 3 years |
Short Term Capital Gains Tax | 15% | As per applicable slab |
Long Term Capital Gains Tax | 0% | 20% with Indexation |
SWP redemption works on the principle of FIFO i.e. first in first out. This means at the time of redemption of units, those units are assumed to be redeemed which were invested first and then tax liability is calculated. Let’s understand it by going back to Guptaji.
Guptaji has invested above amount (Rs. 200,000) in equity mutual funds (out of many different types of mutual funds) and first investment was done 5 years ago. Therefore when he withdraws the money now, he doesn’t have to pay any taxes on it since holding period is 5 years which qualifies it for Long Term Capital Gains Tax and LTCG for equity is ZERO. If he had invested in debt mutual fund, then he would have to pay 20% after taking into factor indexation which would have reduced his tax liability by a great amount.
Now with an understanding of taxation of SWP in mutual funds, it is not difficult to see why it is a much better option than FDs since in FDs, return is taxed as per your tax slab.
SWP (systematic withdrawal plan) is a great way to manage retirement. But remember wealth is created only when you stay invested for a long period of time. So start now!