Benefits of SWP in Mutual Funds – Systematic Withdrawal Plan

SWP for Monthly Income in Mutual Funds [Calculations]

SWP or Systematic Withdrawal Plan helps you to redeem or sell the mutual fund units systematically, usually on monthly basis to cover monthly expenses. There are multiple Benefits of SWP – covering the monthly expenses of household, travelling, achieving financial independence, retirement, etc. The idea is to build enough corpus using SIP or lumpsum investments in mutual funds, that the returns will help you to get enough monthly income.

Let us understand benefits of SWP in detail.

Table of Contents

SWP benefits

1. Monthly Income

SWP helps you to get monthly income based on the 4% withdrawal rule. According to 4% withdrawal rule in SWP, you need to withdraw only 4% from accumulated amount to cover for monthly expenses while your investments are growing with time.

So if the accumulated amount is Rs. 1 crore in mutual funds, you should be getting almost 10 lakh per year as returns considering 10% expected rate of returns. Out of this returns, you should withdraw 4 lakh per year to cover for monthly expenses according to accumulated balance.

In case your expenses are more, you should focus on increasing the accumulated or portfolio amount in mutual funds.

2. Retirement

You can easily retire once you are using the monthly income generated using SWP from mutual funds. I have explained how SWP works in a video at the bottom of this article to understand how much monthly income you can get using SWP.

Retirement is the phase where you no longer should be working for money and this phase is achieved after you have achieved financial independence. SWP helps you to achieve Financial Independence as well.

ALSO READ: Retirement Calculator in Excel

3. Travel

You can travel around various cities in India or outside India as well, once you have the source of income which is automatically generating the funds for you.

One of the ideal scenario would be achieving financial Independence by the age of 40 or 45. after which you have enough number of years to travel around the world at places you always wanted to visit.

4. Financial Independence

Financial Independence means you are not dependent on anyone else to provide you money to cover your expenses. As long as we are working for salary to cover the expenses and cannot leave jobs completely, we have not achieved financial independence.

This independence is the mindset where you can leave the job without have to worry about how you will cover the expenses. The monthly expenses will be covered by the monthly income you get from SWP, which should be equal to or higher than your current monthly salary.

So if your salary is Rs. 30,000 per month, accumulate funds in mutual funds from where you should get the returns equal to Rs. 30,000 or more per month. Once you have achieved this scenario, you have mentally achieved financial independence and can leave the job anytime, provided you will continue with same lifestyle

5. Following Passion

Since SWP helps you to achieve financial independence, you can follow your passion of either working on your side projects, starting YouTube channel to share your life experiences, or any other work you always wanted and loved to do.

Working while having fun will not make you feel that you are working for someone or dragging your day. This can be achieved by following your passion.

ALSO READ: SWP for Monthly Income with Calculations

What is SWP (Systematic Withdrawal Plan)

  • SWP full form is Systematic Withdrawal Plan which is an important strategy to understand how money can help you generate more money
  • By the term Systematic Withdrawal Plan, we understand that we need to withdraw money systematically
  • We can only withdraw the money Systematically when we have already accumulated it somewhere. One of the best places is mutual funds
  • We can invest via SIP and lumpsum investments to achieve a financial corpus in mutual funds, after which we can withdraw the amount every month based on certain percentage of return depending on your needs
  • For example, if you have already accumulated Rs. 1 crore in mutual funds that might give you Rs. 10 Lakh returns per year, considering 10% expected rate of returns, we can withdraw may be 4 lakh or 5 lakh every year from this mutual fund to cover our expenses
  • This withdrawal amount should depend on our monthly needs and must be calculated accordingly
  • We also have to consider inflation which is usually at the rate of 6%, and that is why if we are getting 10% consistent returns from mutual funds, we can withdraw 4% of amount every year.

Watch below video to understand how SWP calculations can work to get monthly income for you based on your mutual funds portfolio amount.

SWP for Monthly Income Video

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Frequently Asked Questions

Is SWP a good option?

Yes SWP is one of the best options to help you get monthly income and cover the expenses, without you working for salary or some other active income. SWP or Systematic Withdrawal plan can be used only after you have accumulated enough corpus amount to cover yearly expenses based on your lifestyle

Is SWP better than FD?

SWP and FD are used for different financial goals. For long term financial goals like achieving financial independence or retirement, you need to accumulate enough funds in mutual funds and use SWP to get monthly income to cover the expenses. This will help you get passive income without having to work. But note that the SWP returns are not guaranteed in short term. In long term of 10 to 15 years, we have seen returns of 10% to 15% on average in good mutual funds.

On other hand, FD or fixed deposits help you to achieve your short term financial goals of 1 to 3 years and earn extra interest amount. In order to rely on FD amount during your retirement, you need to have high amount of corpus to get yearly interest income from FD which will be guaranteed.

So if you can take some risk with expectation of some high rewards, SWP is better, or else to get guaranteed fixed interest income, FD is better.

What are the disadvantages of SWP?

Below are some of the disadvantages of SWP:

  • Long Duration: It takes time to accumulate enough funds in mutual funds and start SWP that will replace your salary income. If you already have lumpsum amount than great but if you are just getting started, SIP or Systematic Investment Plan should be consistent for at least 15 to 20 years to reach your financial goal of Rs. 1 crore or more.
  • Returns are not guaranteed: The returns you get in mutual funds are not guaranteed. So if you check for short term of 1 to 2 years, your mutual fund might give negative returns, but over long term, it is believed that market always goes in upward direction thus providing almost 10% to 15% returns over 15 to 20 years.
  • Income is Taxable: The monthly income you decide to withdraw will be taxed as per STCG or LTCG tax rates. So you have to consider these parameters as well while deciding the withdrawal amount every month

What is the SWP return rate?

Like any mutual fund, you can get between 10% to 15% or more based on the mutual fund you have invested in. Small cap mutual funds tend to give higher returns over long term, but everything depends on the market and economy of the country.

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