Investing in Mutual Fund Schemes is always advisable as it fetches good returns. Thereby, a lot of people invest in mutual funds according to their plans and earn returns accordingly. However withdrawal of money from mutual fund schemes are done as per preconceived plan. This plan is termed as Systematic Withdrawal Plan or SWP. In this article, we will be discussing the same.
Being an investor in mutual fund scheme, you would have been curious to know how would you receive your earnings from the capitals gains you made in the mutual fund scheme. Systematic Withdrawal Plan is such a scheme to facilitate that withdrawal.
What is SWP?
Systematic Withdrawal Plan or SWP is a kind of scheme to facilitate the investors to withdraw their earnings at the predetermined time.
For example, withdrawal can be done either annually, half-yearly, quarterly or monthly.
Why SWP is necessary?
Investors are advised to make a systematic plan how would he like to withdraw from mutual fund scheme. For the benefit of investors, it is advised to plan according to their needs. Irresponsible or unplanned withdrawal may render an investment in jeopardy.
It should be planned in such a way that investors are able to withdraw money when they need it the most.
Or, for those who want regular income from their investments then also they must have their SWP done accordingly.
What are withdrawal options?
An investor in mutual fund scheme has mainly two types of withdrawal options. They are –
- Fixed Withdrawal Option – It means the investor can withdraw any amount as per his choices from the fund at a fixed interval.
- Appreciation withdrawal Option – It means the investor can withdraw only the appreciated part of the fund or appreciated amount or capital gains at a fixed interval.
What is Appreciated amount or Capital gains?
When you make an investment in a mutual fund, over a period of time, the net asset value of your investment increases. Thereby total fund value also increases. This is termed as appreciation in the financial world. Hence it is called appreciated amount. It is also known as Capital Gains.
Application of SWP
Understanding Systematic Withdrawal Plan is not that difficult. Just follow me here and I shall make it easy for you with an example.
An investor invests an amount Rs 1,00,000 in a mutual fund scheme. The net asset value of his corpus fund is, say, Rs 10. So, his total asset would become 10,000 units (divide Rs 1,00,000 by Rs 10).
Now, if the investor decides to withdraw a sum of amount, say, Rs 1,000. At the time of withdrawal, if the net value asset (NAV) remains the same, then after withdrawal, a total of 100 units would be redeemed from the investor’s fund and a total of 9,900 units would be left as assets.
Suppose the net value asset has appreciated over a period of time and achieved the value of Rs 20. Now if the investor withdraws money of an amount of Rs 1,000. Then only 50 units (divide Rs 1,000 by Rs 20) would be redeemed and 9,950 units would still be left.
Likewise, if the net asset value has depreciated over the same period of time then more units of fund would be redeemed and lesser would be left in the mutual fund. This goes on like this.
Excessive and unrealistic withdrawal leads to a depreciation in the value of net assets. Hence, it is important to have a Systematic Withdrawal Plan with a goal of meeting your needs, as failing of which may render your investment in jeopardy and an investor may incur losses in future. So a very well withdrawal plan is necessary to have for an investor who invests in mutual fund scheme.
Is the withdrawal under Systematic Withdrawal Plan taxable?
Yes, it is taxable subject to conditions. If the holding period of mutual fund scheme is less than 36 months then withdrawal forms a part of investor’s income and applicable tax is deducted as per the Income Tax Act.
When the holding exceeds the period of 36 months, withdrawal forms a part of capital gains. Capital gains are taxable as per the law i.e. 10% without indexation and 20% with indexation.
Importance of SWP
Planning is very important while making any investment. An investor also has to plan the withdrawal scheme once invested in a mutual fund scheme. That withdrawal scheme is so planned that an investor meets his goal of fulfilling his financial needs and at the same time maintain the corpus fund at such a level so that net asset value does not depreciate.
Investment in mutual fund not the same a investing in fixed deposits. Returns in both vary. Though the investment in fixed deposits are less risky than investment in mutual funds but the returns in mutual funds fetches more returns than fixed deposits.
One more thing to note is that unlike fixed deposits withdrawal under SWP in mutual funds affects the total asset value or corpus fund negatively. In fixed deposits, withdrawal of interests earned does not affect corpus fund or principal amount negatively.
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