HDFC MF

Weekend Bytes
A weekly series from HDFC Mutual Fund

SWP: A smarter way to manage

periodic expenses

hdfcfund.com
Weekend Bytes | March 2024

Over the last few years, SIP has been the buzzword in Indian households.
Increase in Average monthly SIPs from Rs 3,660 Cr in FY17 to Rs 16,359 Cr in
FY24 (Up to Feb’24) bears testimony to this. While the benefits of wealth
creation using SIPs are known widely now, the benefits of SWP (Systematic
Withdrawal Plan) are not talked about enough. Simply speaking, SWP is the
opposite of SIP and helps you withdraw a fixed amount from your Mutual
Fund investments at periodic intervals.

How does it help?

Brings discipline to withdrawals, to meet regular expenses. Redemption of
lower units at higher NAV and vice versa (As the amount of withdrawal is
pre-determined and remains constant). This is Rupee cost averaging in
reverse.

Who should use?

While SWPs can be used by anyone to meet regular expenses, it can be used
by retirees, primarily to meet their regular expenses. This way retirees do not
have to worry about initiating redemptions/ withdrawals to meet regular
expenses.

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How much should be the withdrawal rate?

For individuals with no other source of income, monthly withdrawals

using SWP is required to take care of regular expenses. Consequently,
monthly expenses become a key factor in this puzzle to determine
the rate of withdrawals

While there is no one size fits all, a conservative withdrawal rate is in,
order to give oneself a better chance of avoiding premature erosion
of capital.

Ultimately, how much rate of withdrawal is ideal, is a function of your

monthly expenses, rate of inflation, investment corpus and also, the
rate of the return on your portfolio. Now practically speaking, you
cannot have complete control over any of these factors. What you
could do though is, have a sustainable lifestyle so that your future
expenses are manageable. You could plan for your retirement as
early as possible to build a reasonably large corpus. Post-retirement,
you could have the right asset class mix as per your risk appetite –
not overly aggressive or conservative but an optimal one.

Ideally speaking, one could factor in the potential return of the fund
and reduce the inflation rate from it. For instance if the expected
return from the fund is A% and the inflation rate is B%, then (A-B)%
could be the SWP rate that one could target. This way, one could aim
to preserve the real value of the portfolio (adjusted for inflation) and
avoid the possibility of depleting the corpus sooner. Rate of returns on
investment and rate of inflation can fluctuate significantly and could
have a bearing on the outcome though.

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Tax advantage of SWPs

When you redeem MF units using SWP, you are taxed only
on capital gains arising from the redemption, and not the
entire withdrawal. In contrast, for Fixed Deposits, entire
interest income is taxable at marginal rate of tax, thereby
making SWP more tax efficient as compared to Fixed
income bearing instruments like FDs. Even IDCW
(Income Distribution cum Capital Withdrawal) payouts
are taxed in entirety at marginal rate of tax. Further, if you
are withdrawing from an equity-oriented fund, for units
held longer than 1 year, gains are treated as Long-term
capital gains and allow for exemption of up to Rs 1 Lakhs
in a particular FY

% %

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SWP vs IDCW
Apart from the tax advantage, SWP is also more reliable in terms of cash
flows as compared to IDCW (Income Distribution cum Capital Withdrawal)
payouts, which are not assured periodic cash flows and are subject to
availability of distributable surplus.

SWP IDCW FD Interest

Taxation Only Gains taxed as Entire payout Interest is fully
capital gains. For taxed at taxable at
equity-oriented marginal tax marginal rate
funds, for units held rate of tax
for more than a year,
gains are taxed as
Long-Term Capital
Gains and allow an
exemption of up to
Rs 1 Lakh per FY

Predictability
Yes Variable Yes
of cash flow

Flexibility of
withdrawal Yes No No
amount

Liquidity Entire amount can Entire amount is Entire amount can

be redeemed from paid out be withdrawn at
most MFs at any any time, although
point in time subject subject to penalty
to applicable load on interest rate

All said and done, each individual may

have unique financial circumstances
and risk appetite. It is recommended to
consult a financial advisor to determine
the appropriate withdrawal using SWP.

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS,

READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
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