Understanding SWP frequency options

Systematic Withdrawal Plan (SWP) are a popular choice for investors looking to get a steady cashflow from their mutual fund investments. This method offers a structured way to access a portion of your investments while potentially earning returns on the remainder. SWP in mutual funds is particularly beneficial for creating regular cashflow streams after retirement or for meeting scheduled expenses.

SWPs also help maintain a disciplined approach to wealth withdrawal by imposing limits to the withdrawal amount.

Let’s take a closer look at the different SWP frequency options, and how to identify which one is the most suitable for you.

• Table of contents

1. What is SWP frequency?
2. Different SWP frequency options
3. Factors to consider when choosing SWP frequency
4. Pros and cons of each frequency option
5. Which SWP frequency should you choose?
6. Things to keep in mind before choosing SWP

What is SWP frequency?

SWP frequency refers to how often you withdraw a fixed amount from your mutual fund investment through a Systematic Withdrawal Plan (SWP). Mutual funds offer various frequency options, and a suitable one depends on your income, expenses, and goals.

Different SWP frequency options

1. Daily SWP

Key features: Withdrawals happen every business day.

Benefits: Potential for daily income

Suitable for: Individuals who need daily cash flow for specific purposes. It may also be suitable for those who prefer smaller and more frequent withdrawals

2. Weekly SWP

Key features: Withdrawals occur once a week.

Benefits: Suitable for weekly expenses

Suitable: Individuals with regular weekly expenses or who want staggered incomes.

3. Monthly SWP

Key features: Withdrawals occur once a month.

Benefits: Common and convenient for monthly expenses, easier to manage.

Suitable for: Most investors with monthly expenses like rent and utilities.

4. Quarterly SWP

Key features: Withdrawals every three months.

Benefits: Suitable for larger, less frequent expenses

Suitable for: Those with quarterly expenses and a preference for larger, infrequent withdrawals.

5. Half-yearly SWP

Key features: Withdrawals every six months.

Benefits: Can help meet large expenses.

Suitable for: Individuals looking for occasional surplus funds to finance big expenses.

6. Annual SWP

Key features: Withdrawals once a year.

Benefits: Least frequent withdrawals, suitable for major annual expenses.

Suitable: Those who want a bonus-like annual lumpsum

Factors to consider when choosing SWP frequency

Choosing the right SWP frequency involves several considerations:

• Financial requirements: Your immediate and future cash requirements play an important role. If you need a regular income to manage daily expenses – such as after retirement – a monthly SWP might be beneficial. For those who have periodic expenses, quarterly withdrawals could be a better fit.
• Investment size:The amount you have invested in the SWP mutual funds also matters. Larger investments can sustain more frequent withdrawals without quickly depleting the principal amount.
• Tax implications: SWP can have varying tax implications based on the fund type, such as equity funds or liquid funds. Tax is charged only on the capital gains portion of your withdrawal. Capital gains tax on debt funds is as per your tax bracket. Capital gains on equity funds held for less than a year are taxed at 15% and those held for more than a year are taxed at 10%. Understanding these differences helps reduce tax liabilities.
• Return potential: Less frequent withdrawals mean your money stays invested for longer, which may provide more opportunities for compounding on potential returns. You can consider using an SIP growth calculator to plan your investment amount since the tool helps you visualise the potential returns.
• Market conditions: The performance of the market can influence the impact of withdrawals. In a declining market, frequent withdrawals can eat into the principal amount by a greater degree, because you will need to redeem more units to get the desired amount. In a rising market, you will withdraw fewer units, but might lose out on potential gains.

Pros and cons of each frequency option

1. Daily SWP

Pros: Provides the most frequent income stream and helps capture very short-term market movements. Facilitates ready availability of funds on a daily basis.

Cons: Small payouts may not cover significant, infrequent expenses.

2. Weekly SWP

Pros: More frequent withdrawals than monthly, less market timing risk.

Cons: May not fit all investment objectives.

3. Monthly SWP

Pros: Common and widely used, aligns well with monthly expenses and easier to manage.

Cons: Not suitable for expenses occurring more or less frequently than monthly.

4. Quarterly SWP

Pros: Suitable for large, less frequent expenses.

Cons: Less frequent income stream may not meet all cash flow needs, market timing risks are higher because withdrawals are made once every quarter.

5. Half-yearly SWP

Pros: Can help manage lumpsum expenses, such as travel or tuition payments.

Cons: Limited liquidity for frequent cash needs, greater market timing risk with fewer withdrawal intervals. Requires disciplined budgeting for semi-annual payouts.

6. Annual SWP

Pros: Suitable for large annual expenses.

Cons: Very infrequent withdrawals may not be suitable for most investors, especially those looking for a source of secondary income or a regular income stream. Market timing risk is significant because redemptions happen only once a year.

Which SWP frequency should you choose?

The best SWP frequency depends on your individual situation. Here's how to decide:

• Align with your expenses: For regular expenses (e.g., rent, utilities), a monthly SWP is most suitable. For less frequent expenses (e.g., quarterly insurance), consider quarterly or annual SWPs.
• Consider your risk tolerance: More frequent withdrawals may spread market risk over time.
• Investment objectives: For those seeking a regular income stream, a monthly SWP may be suitable. Those who need larger, more infrequent payments – occasional lumpsum funds – a quarterly, semi-annual or annual frequency may be suitable. Daily or weekly SWP may be suitable for those who find it easier to manage smaller and more consistent instalments.
• Investment horizon: If your investment horizon is long, less frequent withdrawals help minimize market fluctuations.

Things to keep in mind before choosing SWP:

SWP can be a good option for those looking at regular cashflow through their mutual fund investments. However, those who are seeking potential long-term wealth creation may lose out on the effect of compounding on a portion of their investments because of regular withdrawals.

Keep your larger financial goals and tax implications in mind when opting for SWP. The additional capital infusion may help in the short term but could affect the final size of your corpus over the long term. So, investors should opt for SWP only if recurring cashflow is a part of their financial planning strategy.

Conclusion

Choosing the right frequency for your SWP in mutual funds depends on your individual financial needs, investment goals, and other personal circumstances. It's important to assess your requirements and consult with a financial advisor to make an informed decision.

FAQs

What are the different SWP frequency options available?

SWP mutual funds typically offer three main withdrawal frequencies: monthly, quarterly, and annually. Each option caters to different cash flow needs and financial planning strategies.

How do I determine which SWP frequency is best for me?

To choose the best SWP frequency, consider your financial needs, investment size, potential tax implications, and your investment goals. Analysing these factors can help determine the most suitable withdrawal schedule.

Can I change my SWP frequency after setting it up?

Yes, most SWP mutual funds allow you to change the withdrawal frequency. This flexibility is useful for adapting to changes in your financial situation or investment goals over time.

How does monthly SWP differ from quarterly SWP?

The primary difference between monthly and quarterly SWP is the withdrawal frequency. Monthly SWP potentially offers regular income for monthly expenses, while quarterly SWP suits larger, less frequent expenses.

Which SWP frequency is ideal for retirees?

For retirees, monthly SWP may be more suitable, as it provides a regular income stream to manage monthly expenses and bill payments. However, the suitable frequency for each individual may defer depending upon their income needs.

Can I change my SWP frequency after starting?

You can generally change your SWP frequency with most fund houses. The change can typically be made online or offline directly through the AMC, or through a registered mutual fund distributor, depending upon your investment mode. Ensure to check the fund house's specific rules and consider potential market impact before initiating the change. Always review the terms for accurate procedures.

Are there any tax implications for different SWP frequencies?

The frequency of an SWP does not directly affect tax implications, as taxation is based on the gains from each withdrawal rather than how often they occur. So, taxes will depend more upon the withdrawal amount, capital gains amount and holding period of the units before withdrawal.

What factors should I consider when choosing an SWP frequency?

When selecting an SWP frequency, consider your income and expense needs, risk tolerance, investment objectives, horizon, fund type, market conditions, fund performance, and personal preferences.

What are the benefits of using an SWP calculator for withdrawals?

An SWP calculator helps estimate regular withdrawals while ensuring your funds last longer. It’s useful for planning retirement income or steady cash flow.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.