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Photo: iStock
Photo: iStock

Term of the day: Systematic withdrawal plan

A systematic withdrawal plan or SWP allows you to redeem portions of your investments regularly

As the name suggests, a systematic withdrawal plan or SWP allows you to redeem portions of your investments regularly. This regular withdrawal gets credited directly to your bank account.

To set these plans in motion, you have to first make a lump sum investment into a mutual fund of your choice.

Once the investment is made, you can structure the SWP at an interval that is suitable for you—monthly, quarterly, half yearly or annually. The amount for withdrawal and the periodic date can be pre-determined. A one-time instruction with all these details is to be given to the mutual fund house you have chosen.

You must keep in mind that every withdrawal is liable to capital gains tax as the case may be. Additionally, keep in mind that unless you have made gains in the investment, you will be withdrawing capital.

Ensure that the fund you are using for an SWP doesn’t have an exit load or that the SWP begins only after the exit load period is over.

Ideally, calculate an optimal amount for SWP based on your initial investment, after considering potential gains and tax impact, with the help of an advisor.

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