Mutual funds have evolved as one of the most preferred investment options for individuals seeking both growth and income. Among the various facilities offered by mutual funds, the Systematic Withdrawal Plan (SWP) stands out as a best tool for those looking to generate regular income. If you’re wondering What is SWP in Mutual Funds and How to Maximize Returns from it, this article will guide you through the essentials.
Investors can also read 5 Best Mutual Funds for Lumpsum Investment in 2025
What is SWP Option in Mutual Funds?
A Systematic Withdrawal Plan (SWP) is a facility provided by mutual funds that allows investors to withdraw a fixed amount of money at regular intervals (monthly, quarterly, etc.) from their invested corpus. SWP works exactly opposite to SIP. Unlike a Systematic Investment Plan (SIP), where you invest periodically, an SWP helps you redeem your units systematically. The amount withdrawn can be credited to your bank account directly, making it an excellent option for retirees, or anyone looking for regular consistent cash flow.
For example, if you have invested ₹10,00,000 in a mutual fund and set up an SWP to withdraw ₹10,000 monthly, the fund will redeem units equivalent to the amount requested. Based on current redemption rules, it takes 2 working days to for equity fund and 1 working day for debt fund for the amount to be credited to investors bank account. This ensures regular income while keeping the remaining investment intact and potentially growing.
Benefits of SWP in Mutual Funds
- Regular Income: SWP provides a regular cash flow, ideal for retirees or those seeking regular income.
- For instance, a retiree with a ₹20,00,000 investment in a balanced mutual fund can opt for an SWP of ₹16,000 per month, ensuring steady income without liquidating the entire corpus.
- Tax Efficiency: The capital gains on SWP withdrawals are taxed differently from dividends, often leading to lower tax liability.
- Example: If you withdraw ₹50,000 annually from an equity mutual fund after holding it for more than a year, the long-term capital gains tax applies only to the profits, which can be more tax-efficient compared to withdrawing from other sources.
- Rupee Cost Averaging: Units are redeemed systematically, which can help in reducing the impact of market volatility.
- Customizable: You can choose the withdrawal amount and frequency as per your requirements.
- Wealth Preservation: With disciplined withdrawals, you can maintain your investment corpus for a longer period.
- For instance, an investor withdrawing ₹5,000 per month from a corpus of ₹15,00,000 in a hybrid fund can sustain withdrawals for years while enjoying moderate growth on the remaining investment.
- Flexibility: SWP is not a fixed option; you can modify or stop it anytime based on your financial needs.
Drawbacks of SWP in Mutual Funds
- Erosion of Corpus: Excessive withdrawal amounts can reduced your corpus faster, especially in a bear market.
- Example: An investor withdrawing ₹16,000 monthly from a ₹20,00,000 corpus in a poorly performing equity fund during a market downturn might see the investment corpus shrink rapidly.
- Market Risks: The remaining investment is subject to market volatility, which could affect its growth potential. Front Running in Mutual Funds can also effect your MF portfolio.
- Taxation on Capital Gains: While SWP is tax-efficient, short-term capital gains (for equity funds held less than one year) can attract higher taxes.
- Impact of Inflation: If the withdrawal amount does not account for inflation, your purchasing power might decline over time.
- Fund Performance Risk: Poor fund performance can lead to a faster reduction of your corpus.
10 Tips to Maximize Returns from SWP in Mutual Funds
- Choose the Right Fund: Opt for funds with a history of consistent performance. Balanced or hybrid funds often strike a good balance between risk and reward.
- Example: Hybrid funds like HDFC Balanced Advantage Fund or ICICI Prudential Equity & Debt Fund are some of the popular choices for SWP due to their stability.
- You can check from the list of 20 Equity Mutual Funds with Low Beta and High Alpha that can help you to reduce volatality and aim for higher returns.
- Start with a Larger Corpus: A larger investment corpus ensures sustainability and allows your money to grow while you withdraw.
- Start with STP if markets are at peak: Just ensure that you don’t invest large corpus when stock markets are at peak stage. In such case, do Systematic Transfer Plan (STP) for over 9-12 months to build such larger corpus.
- Limit Withdrawal Amount: Historically a balanced Mutual Fund or considering some of the Top Blue-Chip Mutual Funds have generated over 10% annualised returns, keep withdrawals within a range that does not exceed the average returns generated by the fund. A withdrawal rate of 4-6% annually is generally sustainable.
- Reinvest Returns: Consider reinvesting a portion of your returns to offset withdrawals and maintain your investment corpus.
- Align with Financial Goals: Tailor your SWP amount and frequency to meet your specific financial needs without overburdening the fund.
- Account for Inflation: Adjust your withdrawal amount periodically to keep pace with inflation and maintain purchasing power.
- Monitor Fund Performance: Regularly review your fund’s performance and switch to a better-performing fund if needed.
- Leverage Tax Benefits: Opt for long-term investments to benefit from lower long-term capital gains tax rates.
- Diversify Investments: Don’t rely solely on one mutual fund. Diversify across asset classes and fund categories to minimize risk.
- Example: An investor can allocate 50% of their portfolio to equity-oriented funds and 50% to debt-oriented funds to balance risk and returns. One can also check 10 Mutual Funds Recommended by Grok AI that has funds across various categories.
Conclusion: A Systematic Withdrawal Plan is a powerful tool for generating regular income from your mutual fund investments. By choosing the right fund, maintaining a moderate withdrawal rate, and periodically reviewing your plan, you can enjoy steady cash flow while preserving your wealth.
Happy investing in Mutual Funds !
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