Systematic Withdrawal Plan (SWP) is exactly the opposite of SIP. In SWP, investors can invest in a mutual fund scheme and withdraw a fixed amount regularly from the investment. The objective of the SWP is to create regular income flow. Many investors might not be aware of how to use the Systematic Withdrawal Plan (SWP) feature in mutual funds. As an example, if an investor thinks to use SWP features in Midcap or small cap funds, it could turn to be a disaster. Hence, one need to use this feature by understanding how exactly it would work. What is SWP and how does it work? Which are the Best SWP Mutual funds to invest in 2022 in India?
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What is Systematic Withdrawal Plan (SWP) and how does it work?
Systematic Withdrawal Plan (SWP) is exactly the opposite of Systematic Investment Plan (SIP).
In SIP, investors would invest regularly in a mutual fund scheme in a disciplined way for medium to long term.
In case of the Systematic Withdrawal Plan (SWP), one can invest lumpsum in a mutual fund and withdraws a fixed amount regularly.
Let me explain with an example.
Mr. Rajesh has Rs 30 Lacs and want to invest in mutual funds to create a regular flow of money to use for monthly expenses. He wishes to withdraw an approximate of 4% per annum i.e. 120,000 per annum, which turns to be Rs 10,000 per month.
He would invest 30 Lacs in a mutual fund scheme and puts SWP for Rs 10,000 per month. This amount of 10,000 would credited to his bank account every month on the date which he has chosen.
This way, Mr Rajesh would have regular flow of money every month.
How much money one should withdraw through SWP in mutual funds?
Investors think that whatever returns they may get can be withdrawn. While this approach can look good on paper, the underlying value would reduce in future. The value of Rs 1 Crore today might not be same after 5 years or 10 years. One of the best ways to overcome this is to withdraw only 4% of the corpus.
Continuing above example, Mr. Rajesh might earn 4% to 12% (depending on a mutual fund chosen), however, by withdrawing only 4%, his money would continue to grow after considering his monthly withdrawals.
How to choose a Best SWP Mutual Funds to invest in 2022?
This is the critical part in the selection of SWP mutual fund schemes.
In case of SIP, one can choose mutual funds based on risk appetite, financial goals and how long they can invest. Investors who are investing for over 10 years need not worry about stock market volatility in the short term as the goal is to invest in medium to long term.
However, in case of Systematic Withdrawal Plan (SWP), one would invest lumpsum and it could turn riskier if the stock market falls or stagnant for the next few years. Hence, one can adopt below approach in choosing SWP mutual funds.
Risk takers – Invest in Large Cap Funds for SWP
Moderate to low risk investors – Invest in Balanced Advantage Funds for SWP
Low risk investors – Invest in Liquid funds or Short Term Funds for SWP
Best SWP Mutual Funds to invest in 2022
Based on the risk appetite, investors can choose SWP mutual fund schemes for investment.
Best SWP mutual funds for 2022 – Risk Takers
These funds invest majorly in large cap companies that are part of NIFTY100 Index. This index contains stable growth companies.
| Fund Name | 1 Year | 3 Years | 5 Years |
|---|---|---|---|
| Axis Bluechip Fund | 11% | 19% | 18% |
| Canara Robeco Bluechip Equity Fund | 13% | 21% | 17% |
| Mirae Asset Large Cap Fund | 12% | 17% | 15% |
Investors with a moderate risk appetite can invest in these funds and do systematic withdrawal plan (SWP) to have regular flow of money.
Instead of investing a lump sum in one go, they can invest in 6-9 SIPs/lots before they opt for SWP. This way, investors would not be investing in single shot where there is an element of risk.
These funds have generated 12% to 18% annualized returns in the last 3 to 5 years. However, investors can expect 12% annualized returns in future.
Best SWP mutual funds for 2022 – Moderate risk to low risk takers
Moderate risk to low risk investors can opt for Balanced Advantage Funds. These funds invest in equity and debt.
| Fund Name | 1 Year | 3 Years | 5 Years |
|---|---|---|---|
| Edelweiss Balanced Advantage Fund | 11% | 18% | 14% |
| HDFC Balanced Advantage Fund | 13% | 15% | 12% |
| ICICI Pru Balanced Advantage Fund | 10% | 14% | 12% |
These funds generally invest more in equity when stock markets are falling (by reducing debt) and reduce equity investment when stock markets reaching new highs (increase debt investments). This way these funds provide stable returns.
Since these SWP mutual funds invest in equity and debt, these are relatively low risk compared to equity funds.
One can invest lumpsum and start SWP at any point of time.
These funds have generated 11% to 18% annualized returns in the last 3 to 5 years. However, investors can expect 10% to 12% annualized returns in future.
Best SWP mutual funds for 2022 – Low Risk
Investors with low risk appetite can consider liquid funds or ultra short term mutual funds to do SWP.
| Fund Name | 1 Year | 3 Years | 5 Years |
|---|---|---|---|
| ICICI Pru Ultra Short Term Fund | 5% | 7% | 7% |
| PGIM Ultra Short Duration Fund | 4% | 8% | 8% |
| Quant Liquid Fund | 4% | 5% | 6% |
While liquid funds come with zero risk, ultra short term funds have some element of risk.
Since these funds are very low risk, they generate low returns too.
Liquid funds generate between 4% to 5% annualized returns and ultra short term funds can generate 4% to 8% returns. The only drawback from these funds is that such funds may not provide much growth in the investments as investors would be withdrawing 4% every year and the actual returns are slightly higher than this which might not beat inflation.
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Benefits in SWP Mutual Funds
Here are the key benefits of using SWP in mutual funds.
1) Fixed Flow – SWP mutual funds would provide a fixed flow of money. If you have a lump sum and aim for regular flow of money to meet regular expenses, you can opt SWP mutual funds.
2) Disciplined Withdrawals – SIP provides a disciplined investment on a regular basis. Same way SWP provides disciplined withdrawals. You would withdraw a fixed amount every month irrespective of your expenses. In a way you are arresting fluctuating withdrawals which would otherwise dent to your corpus.
3) Alternative to Pension – If you do not have a pension or not opted for pension for various reasons, the SWP in mutual funds can provide a regular flow of money which can help you to meet monthly expenses post retirement.
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What about SWP withdrawal on capital appreciation.
If so, will one can give its limit (i.e. up to 5% of capital appreciation)?
If you please mention with an example it’ll be good to us.
Thank you in advance.
Nice one Suresh. Very well explained with scenarios.
One query when we withdraw every month, won’t this withdrawn amount be liable to short term capital gain and taxed at 15% ?
And what is right time to invest in swp mode?
And sbi equity hybrid fund also is good ?
Hello Nanmith, Thanks for your comments 1) Yes STCG is applicable. It would be on first in first out (FIFO basis) basis of investment. You can get statement from Mycams / Kfintech / Kuvera/Groww for tax statement applicable for that year 2) Like I indicated there is no specific timing to invest in SWP. If stock markets are taking correction (20% or above), one can go for lumpsum investment, else one can invest in SIP for 6-9 months and then start SWP. 3) Equity Hybrid funds invests upto 80% in equity and 20% in debt. Hence these are riskier. But you can still go ahead with this if the SWP is not for shorter period (> 5 years is good).
Hi Sir,
I have 2 clarification .
1.what is the difference b/w Lumpsum and SWP sir , In some of the sites like ETmoney , Grow app and iNDmoney we have options for Lumpsum and SIP not the SWP .
2.For the SWP —- Eg can i withdraw 8 % when market was good 4 to 5 % when market was not good ,wther this options is there .
1) SIP and lumpsum is for investing your money
SWP is for withdrawal. Once you invest, go to your mutual fund scheme and select SWP, enter amount (how much you want to withdraw) and date. On that particular date, amount would be redeemed and within 3 days money would be credited to your bank account
2) You can always withdraw whatever amount you want. e.g. You can say 10,000 per month and later on, modify to 8,000 or 12,000. It as per your wish.
Hi Mr Suresh,
Thanks for your article.
One query: If one mid aged person(below 50) have no pension fund should he/she opt to SIP(first make a fund)+ SWP Or take a pension plan?
I mean for that guy which is more suitable – (SIP+SWP) Or take a pension plan?
If that guy aged below 40 then what should he opt or or both?
Again thanks for your valuable article.
Pension plans provide fixed returns. However SWP can provide higher returns compared to pension plan, however returns of the mutual fund might fluctuate in short term
Thanks for useful article.Please provide STP.
thanks for your useful articles How about an article on Best Mutual Funds for STP to invest lumpsum now in 2022? Kindly issue. Thanks.
STP or SIP – MF Schemes would not have have any change.