Mutual fund investments can help you repay your loan EMIs through the SWP option. You must be wondering what SWPs are. Like mutual fund companies allow you to invest a fixed amount under SIP on a regular interval in a mutual fund scheme, similarly, they will enable you to withdraw a fixed amount on a regular interval from your investment in a mutual fund scheme and the process of withdrawing such investment is called Systematic Withdrawal Plan (SWP). You can request the fund house to set up an SWP of the requisite fixed amount on a particular date every month. On the SWP date, the fund house sells the required mutual fund units to transfer the SWP amount to your bank account. The remaining units in your mutual fund portfolio continue to earn the return despite the SWP process. Now, let’s find out how SWP can help you pay your loan EMIs.

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Using SWP To Repay Loan EMIs

The benefit of using the SWP to repay loan EMI is that you can continue to invest through SIP and use the return earned on its invested corpus to repay the loan. So, on one side you continue investment and earn the return on it, and on the other, you clear the outstanding loan using the SWP.

When the return on investment is higher than the loan interest rate, you can use the SWP to repay the loan EMI. However, when the loan interest rate is higher than the return on investment from your mutual fund scheme, it is better to repay the loan directly using your income instead of diverting it towards investment.

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Things To Keep In Mind

You can create SWP in any of the mutual fund schemes in your investment portfolio. Choose such schemes which give you a higher return than the interest applicable on your loans. Avoid setting the SWP on a new equity fund because it may not give you a consistent return due to high volatility. You may set up SWP in a debt fund for more consistent repayment.

SWPs are not subject to a tax deducted at source (TDS), but you have to pay the tax on the profit booked during the particular financial year depending on the nature of the underlying fund and according to the applicable capital gain tax rate. Try to preserve your invested capital when setting up SWP and withdraw only the return portion to repay the loan.

The author is an independent financial journalist.