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Reverse SIP: Creating a Regular Cash Flow with SWP
While an SIP is used to accumulate wealth, a Systematic Withdrawal Plan (SWP) is its functional opposite. It allows you to withdraw a fixed amount of money from your mutual fund corpus at regular intervals (monthly, quarterly, or annually). For retirees or those looking for a secondary income stream in India, SWP is often superior to traditional Fixed Deposits (FDs) due to its higher tax efficiency and flexibility.
The Tax Advantage of SWP
In a Fixed Deposit, the entire interest earned is taxable as per your income slab. In an SWP, only the 'capital gains' portion of the withdrawal is taxed. For example, if you withdraw ₹10,000 and the profit portion in that is only ₹2,000, you only pay tax on that ₹2,000. If held for more than a year in equity funds, you benefit from LTCG rates, which are significantly lower than high-income tax slabs.
Managing Market Volatility
A key strategy for a successful SWP is choosing the right fund. Most financial planners recommend starting an SWP from 'Hybrid' or 'Debt' funds rather than pure 'Small Cap' funds to avoid withdrawing large chunks of units during market downturns. This ensures your remaining corpus continues to grow while providing you with the necessary liquidity.
