Systematic Withdrawal Plan (SWP) is a type of scheme offered by mutual funds which allow you to withdraw a particular amount every month or quarter from your investments.
Systematic withdrawal plan generates small regular cash flows from one's savings accumulated in a fund over time.
This scheme is quite opposite to systematic Investment plans where one needs to invest every month. However, one should not confuse with the dividend paying scheme, where the dividend is paid from the gains and corpus is left untouched.
In case of SWP, the amount is withdrawn from the invested corpus along with gains it made and the invested amount drains out during the tenure.
1) Withdrawal Options
The two options available are fixed amount and appreciation withdrawal. Individuals can either withdraw fixed sum on the SWP date or, any appreciation happened in the scheme as on the SWP date will be redeemed from fund periodically.
2) Fixed Income
This is suitable for individuals such as risk averse or pensioners who are looking for fixed income at regular intervals for meeting one's financial needs during retirement or otherwise.
When you opt for equity-oriented mutual fund schemes they offer inflation adjusted returns, unlike other fixed income securities.
For debt-oriented SWPs, an investor is liable to pay short-term or long-term capital gain (STCG or LTCG).
The higher tax advantage is applicable to investors on opting for SWP from equity-oriented funds as no long-term capital gain is payable for investment holding period of over 1 year.
5) Erosion of Investments
The major disadvantage of a systematic withdrawal plan is that it would at some point in time erode an individual's capital which has been accumulated over a period of time.