What is Systematic Withdrawal Plan (SWP) in Mutual Funds?
Systematic Withdrawal Plan or SWP, as popularly known, is a service offered by Mutual Funds which provides investors withdrawal of a specific amount of payout at a predetermined time frequency, like weekly, fortnightly, monthly, quarterly, half-yearly or annually.
Unfortunately, this is a much-underestimated investment strategy in India. If understood properly, this could become the most effective and tax efficient way to earn regular returns from Mutual funds. Through a series of our articles on SWP, we will try to educate the investors about SWP, how it works and the tax benefits etc. by showing some examples of top performing Balanced Funds.
As you know already Balanced Mutual Funds invests 65 – 75 % of the portfolio in equities and rest in debt or money market instruments and also that the balanced funds are subject to equity taxation as these are hybrid equity oriented mutual funds. Long-term capital gains, for an investment period of more than 1 year and the dividends received from balanced funds - both are tax-free. Short-term capital gains applicable for investments of less than 1 year are taxed at 15%.
How SWP worked in case of Birla Sun Life Balanced 95 Fund – Growth Plan
SWP (Systematic Withdrawal Plan) results
From the above image, you can see that the investor would have withdrawn a total of
र 18.76 Lakhs through 175 increasing SWP instalments, starting from Rs. 8,000 per month in the first year and ending with र 13,600 per month in the last year. Therefore, he would have got a tax free return of 9.6% in the first year which gradually increased every year and in the last year, it was 16.32%. Even after withdrawing a tax-free amount of र 18.76 Lacs, the current value of his investment would be र 50.19 Lakhs! The fund gave an annualised (IRR) 17.13% return
You will notice from the above image, how we have increased the SWP amount annually by 5% on the initial investment. You will also notice that during this entire period, the net investment value dropped to lesser than the initial lump sum investment amount i.e.
र 10.00 Lacs, only during the initial period of 20 months (January 2002 to August 2003). You must have also noticed that barring this 20 month, the remaining period the net investment value never gone down to less than the initial investment of र 10.00 Lacs even though we increased the SWP amount by 5% annually.
It proves that if you remain invested over a long period in balanced funds then the trailing returns should be positive.