Systematic Withdrawal Plan is a scheme where investors can withdraw a fixed amount of money from their funds periodically. The investor can customize the cash flow according to his wishes. The frequency of withdrawal is chosen by the investor. This is favorable for retired individuals who can generate income periodically with low-risk funds.
Benefits of choosing SWP over dividends:
Until April 2018, equities did not have any LTCG. This encouraged a lot of investors to invest in long term equity funds. But then the financial minister introduced LTCG tax for capital gains more than 1 Lakh in a year. SWP funds are treated same as equity funds for taxation purposes but they allow the investor to withdraw money periodically, unlike non-SWP funds.
Investors who have opted for dividend option in long term funds will also have to pat DDT in addition to LTCG tax. Debt funds deduct up to 12.5% as DDT from the dividends.In SWP, there is no dividends and hence, no DDT. This is a major reason why a lot of investors are moving towards Systematic Withdrawal Plans.
Lower market risk:
When you invest using SIPs, you can avoid the bad market cycles at the time of investing.When the prices are high, you buy less and when the prices are low, you automatically buy more.SWPs help you avoid bad markets at the time of redemption. When prices increase, you can redeem more money and vice-versa.The same isn't possible with dividends.
The consistency of dividends depends on the fund and in many cases, dividends are not regular. The dividend declared may not be same everyphase. But in SWP, you have the assurance of a fixed income periodically. Dividends are not fixed or guaranteed like SWPs are.
Dividends provide regular income to the investor but sometimes, dividends can be low or in rare cases, zero dividends will be declared. Also when dividends are paid out, they come with DDT like mentioned earlier. But with SWP, you can generate a regular income with no tax and there is an assurance of payout is SWP. They also score better when they have accumulated a substantial sum. Swarup Mohanty of Mirae Asset Global Investments say, "Systematic Withdrawal Plan is a better option than dividend even without the levy of tax on the latter. Under SWP, the investor can take out an amount matching his specific requirements, while dividend option does not allow him to do that and leaves him at the hands of the mutual fund company"
How to set up an SWP?
If you are a new investor or if you are looking to start investing in a new fund, you can simply opt for an SWP option. If you are already investing in a particular scheme and you wish to start SWP, you need to fill out an instruction slip with the AMC and you will be set to receive periodic cash flows.