SWP in Mutual Funds: How It Works, Benefits and Best Plans

Ever wondered how to turn your investments into a steady income stream? Systematic Withdrawal Plans (SWPs) in mutual funds might be the answer you’re looking for.

SWPs have become a popular choice for Indian investors seeking regular cash flow from their mutual fund investments. This financial strategy allows you to withdraw a fixed amount from your mutual fund at predetermined intervals, providing a consistent income while keeping your investment intact.

This article will look at SWPs in Indian mutual funds. We’ll explain how they work, their advantages, and why more investors are interested in them for financial flexibility. Whether you’re an experienced investor or new to investing, knowing about SWPs can help you make better choices for your investment portfolio.

What Is SWP in Mutual Funds?

A Systematic Withdrawal Plan (SWP) in mutual funds is a way for investors to withdraw a fixed amount regularly from their investment. This helps them generate regular income while keeping their investment safe.

How SWP Works

SWP operates by selling a specific number of mutual fund units to meet the predetermined withdrawal amount. The process involves:

1. Setting a fixed withdrawal amount
2. Choosing a frequency (monthly, quarterly, or annually)
3. Selecting a start date for withdrawals

For example, if an investor sets up a monthly SWP of ₹10,000, the fund house sells enough units to generate this amount each month. The remaining units continue to grow with market performance.

1. Fixed Withdrawal SWP: Investors withdraw a fixed amount regularly, regardless of market conditions.
2. Appreciation SWP: Withdrawals are made only from the capital gains, preserving the initial investment.
3. Variable Withdrawal SWP: The withdrawal amount changes based on market performance or investor needs.
4. Perpetual SWP: Continues indefinitely until the investor stops it or the investment is exhausted.
5. Capital Protection SWP: Designed to protect the initial investment by limiting withdrawals to gains.

SWP mutual fund schemes offer flexibility, making them suitable for various investor needs. The best SWP for monthly income depends on individual financial goals and risk tolerance. For retired persons and senior citizens, SWPs from debt or balanced funds often provide stable income streams.

Benefits of SWP in Indian Mutual Funds

Systematic Withdrawal Plans (SWPs) offer numerous advantages for investors in Indian mutual funds. These benefits cater to various financial goals and investor preferences, making SWPs a popular choice among retirees and income-seeking individuals.

Regular Income Stream

SWPs provide a consistent and predictable income stream for investors. By setting up a monthly SWP from debt or balanced funds, retirees and senior citizens ensure a stable cash flow to meet their regular expenses. For example, an investor with a corpus of ₹50 lakh can set up a monthly SWP of ₹20,000, effectively managing their retirement income needs.

Tax Efficiency

SWPs offer tax advantages compared to other investment options. Withdrawals from equity mutual funds held for over one year are subject to long-term capital gains tax of 10% only on gains exceeding ₹1 lakh per financial year. This tax efficiency makes SWPs an attractive option for investors looking to optimize their after-tax returns.

Portfolio Rebalancing

SWPs help automatic portfolio rebalancing, maintaining the desired asset allocation. As units are sold periodically, the portfolio naturally adjusts to market conditions. This feature is particularly beneficial in volatile markets, helping investors maintain their risk profile without manual intervention.

Setting Up an SWP in India

Setting up a Systematic Withdrawal Plan (SWP) in India is a straightforward process that allows investors to withdraw a fixed amount from their mutual fund investments at regular intervals. This section outlines the eligibility criteria and the documentation required to establish an SWP.

Eligibility Criteria

To set up an SWP in India, investors must meet the following eligibility requirements:

• Minimum investment: Most mutual fund houses require a minimum investment of ₹5,000 to ₹25,000 in the chosen scheme.
• KYC compliance: Investors must complete the Know Your Customer (KYC) process.
• Age requirement: Typically, individuals aged 18 years and above can start an SWP.
• Bank account: An active bank account linked to the mutual fund investment is necessary.

Process and Documentation

The process of setting up an SWP involves these steps:

1. Choose a mutual fund: Select a suitable mutual fund scheme for the SWP.
2. Determine withdrawal amount: Decide on the fixed amount to be withdrawn periodically.
3. Set withdrawal frequency: Choose monthly, quarterly, or annual withdrawals.
4. Submit SWP form: Fill out the SWP form provided by the mutual fund house.

Required documents for SWP setup:

• Completed SWP form
• Cancelled cheque of the linked bank account
• Copy of PAN card
• Proof of address (if not already submitted)

Investors can initiate an SWP through various channels:

• Online: Many fund houses offer online SWP setup through their websites or mobile apps.
• Offline: Visit the mutual fund house’s office or a registered distributor.
• Third-party platforms: Use authorized investment platforms that help SWP transactions.

By following these steps and providing the necessary documentation, investors can easily set up an SWP to generate regular income from their mutual fund investments.

Best Mutual Funds for SWP in India

Selecting the right mutual funds for Systematic Withdrawal Plans (SWPs) is crucial for consistent returns and steady income. Here are the top-performing mutual fund categories for SWP in India:

Equity Funds

Equity funds offer high growth potential and are suitable for long-term SWP investors:

1. Large-cap funds: Provide stability and consistent returns

• ICICI Prudential Bluechip Fund
• Mirae Asset Large Cap Fund

2. Multi-cap funds: Offer diversification across market capitalizations

• Kotak Standard Multicap Fund
• Axis Multicap Fund

3. Dividend yield funds: Focus on companies with consistent dividend payouts

• UTI Dividend Yield Fund
• ICICI Prudential Dividend Yield Fund

Debt Funds

Debt funds are ideal for conservative investors seeking stable income:

1. Short-term debt funds: Offer low volatility and regular income

• Aditya Birla Sun Life Short Term Fund
• HDFC Short Term Debt Fund

2. Corporate bond funds: Invest in high-quality corporate bonds

• Kotak Corporate Bond Fund
• ICICI Prudential Corporate Bond Fund

3. Banking and PSU debt funds: Focus on safer government and bank securities

• Axis Banking & PSU Debt Fund
• IDFC Banking & PSU Debt Fund

Hybrid Funds

Hybrid funds balance growth and stability, making them excellent choices for SWP:

1. Balanced advantage funds: Dynamically adjust equity and debt allocation

• ICICI Prudential Balanced Advantage Fund
• Edelweiss Balanced Advantage Fund

2. Conservative hybrid funds: Maintain a higher debt allocation for stability

• ICICI Prudential Regular Savings Fund
• Kotak Debt Hybrid Fund

3. Aggressive hybrid funds: Higher equity allocation for growth-oriented investors

• Mirae Asset Hybrid Equity Fund
• Canara Robeco Equity Hybrid Fund

These best SWP mutual fund schemes cater to various risk profiles and investment goals. Investors can choose funds based on their age, risk tolerance, and income requirements. For retirees and senior citizens, a combination of debt and conservative hybrid funds often provides the best SWP for monthly income while preserving capital.

Risks and Considerations of SWP

Systematic Withdrawal Plans (SWPs) offer numerous benefits, but they also come with potential risks. Investors must understand these risks to make informed decisions about their investments.

Market Volatility Impact

Market volatility significantly affects SWPs, particularly in equity-based mutual funds. During market downturns, the value of fund units decreases, requiring the sale of more units to meet the predetermined withdrawal amount. This process, known as reverse rupee-cost averaging, can accelerate capital erosion.

For example, if an investor initially withdraws ₹10,000 from a fund with a Net Asset Value (NAV) of ₹100, they’ll redeem 100 units. But, if the NAV drops to ₹80 due to market volatility, they’ll need to redeem 125 units to maintain the same withdrawal amount, depleting their investment faster.

Potential Depletion of Capital

SWPs carry the risk of depleting the invested capital, especially if withdrawal rates exceed the fund’s returns. This risk is particularly relevant for retirees relying on SWPs as a primary income source.

Consider a scenario where an investor starts with ₹50 lakhs in a balanced advantage fund, withdrawing ₹25,000 monthly:

While the capital grows in this example, a higher withdrawal rate or lower returns could lead to capital depletion over time. Investors must regularly review and adjust their SWP strategy to ensure long-term sustainability.

SWP vs Other Withdrawal Strategies

Systematic Withdrawal Plans (SWPs) offer a structured approach to withdrawing funds from mutual fund investments. This section compares SWPs with other popular withdrawal strategies, highlighting their unique advantages and potential drawbacks.

Systematic Withdrawal Plan vs Dividend Option

SWPs provide more control over cash flow compared to dividend options in mutual funds. Here’s a comparison:

SWPs allow investors to set a fixed withdrawal amount, providing a steady income stream. This feature makes SWPs one of the best options for retirees and senior citizens seeking regular income. In contrast, dividend payouts fluctuate based on the fund’s performance and market conditions.

The tax efficiency of SWPs makes them attractive for long-term investors. Capital gains from equity mutual funds held for more than one year are taxed at a lower rate compared to dividends, which are taxed as income. This tax advantage contributes to SWPs being considered the best SWP plan for monthly income.

SWPs also offer better capital preservation potential. By withdrawing a fixed amount, investors can potentially benefit from market growth while maintaining their investment corpus. Dividend options, on the other hand, may lead to faster depletion of the invested capital, especially during market downturns.

For retired persons looking for a stable income source, SWPs in balanced or debt mutual funds often prove to be the best SWP plan. These funds provide a balance between growth and stability, catering to the risk appetite of senior investors.

Conclusion

SWPs offer a flexible and tax-efficient way to generate regular income from mutual fund investments in India. While they provide numerous benefits such as customizable withdrawals and potential capital preservation they also come with risks especially in volatile markets. Investors must carefully consider their financial goals risk tolerance and market conditions when implementing an SWP strategy.

Regular review and adjustment of SWP plans are crucial for long-term sustainability particularly for retirees. By understanding the pros and cons of SWPs and comparing them with other withdrawal options investors can make informed decisions to optimize their income streams and preserve capital effectively.