Mutual funds have evolved as one of the most favorable investment options for individuals looking for both growth and income. Among the various facilities offered by mutual funds, the systematic withdrawal plan (SWP) stands out as the best tool for those seeking to generate normal income. If you’re wondering What is a mutual fund SWP and how to maximize returns from itIn this article, we will introduce you to essentials.
Investors can read it too 5 Best Mutual Funds from Lumpsum Investment in 2025
What are the SWP options for mutual funds?
A systematic withdrawal plan (SWP) is a facility provided by mutual funds that allow investors to withdraw fixed amounts at regular intervals (e.g. monthly, quarterly, etc.) from the corpus where they were invested. SWP works exactly the opposite of SIP. Unlike a systematic investment plan (SIP), where you invest regularly, SWPs can help you systematically redeem units. The withdrawn amount can be deposited directly into a bank account, making it a great option for retirees and those looking for regular, consistent cash flow.
For example, if you invest £10,000,000 in a mutual fund and set up a SWP to withdraw £10,000 per month, the fund will redeem the units equivalent to the amount requested. Under current redemption rules, the debt fund takes two business days for the equity fund and one business day for the amount loaned to the investor’s bank account. This ensures normal income while potentially maintaining the remaining investments unharmed.
Benefits of SWP in Mutual Funds
- Normal income: SWPs provide regular cash flow and are ideal for retirees or those looking for regular income.
- For example, retirees who invest £20,000,000 in a balanced mutual fund can opt for a SWP of £16,000 per month to ensure a stable income without liquidating the entire corpus.
- Tax efficiency: Capital gains on SWP’s withdrawal differ from taxation, unlike dividends, often leading to lower tax liabilities.
- For example: If you withdraw £50,000 a year from a mutual fund after holding for more than a year, the long-term capital gains tax applies to profits only.
- Rs Average: Units are systematically redeemed and help reduce the impact of market volatility.
- Customizable: You can choose the withdrawal amount and frequency depending on your requirements.
- Preservation of Wealth: Disciplined withdrawals allow you to maintain your investment corpus for a long time.
- For example, investors withdrawing £5,000 a month from a hybrid fund’s £15,000 corpus can maintain their withdrawal for years while enjoying moderate growth on the remaining investments.
- Flexibility: SWP is not a fixed option. You can change or stop it at any time based on your financial needs.
The disadvantages of SWP in mutual funds
- Corpus Erosion: Especially in the bear market, excessive withdrawals can reduce your corpus faster.
- Example: Investors withdrawing £16,000 a month from a corpus of £20,00,000 in a low-performing equity fund during a market slump, could have a rapid shrinking investment corpus.
- Market Risk: The remaining investments could be subject to market volatility and could affect its growth potential. Front Running on Mutual Funds It could also affect the midfielder portfolio.
- Taxation on capital gains: SWPs are tax efficient, but short-term capital gains (for equity capitals under a year) can attract higher taxes.
- The impact of inflation: If your withdrawal amount does not take into account inflation, your purchasing power may decrease over time.
- Fund Performance Risk: A low fund performance could potentially reduce the corpus faster.
10 Tips for Maximizing the Returns from SWPs in Mutual Funds
- Please choose the right fund: Choose funds with a history of consistent performance. A balanced or hybrid fund often balances risk and reward.
- Examples: Hybrid funds such as HDFC Balance Advantage Funds and ICICI Prudential Equity & Debt Funds are some of the common SWP options for stability.
- You can check it from the list 20 equity mutual funds with low beta and high alpha It will help you reduce volatility and aim for a higher return.
- Start with a larger corpus: A larger investment corpus guarantees sustainability and allows you to grow your money while you withdraw.
- If the market is at its peak, start with STP: Don’t invest large corpus when the stock market is at its peak. In such cases, run a Systematic Transfer Plan (STP) for more than 9-12 months to build such a large corpus.
- Limit the withdrawal amount: Historically balanced mutual fund or Top Blue Chip Mutual Fund Generates annual revenue of 10% or more and maintains withdrawals within a range that does not exceed the average return generated by the fund. A withdrawal rate of 4-6% per year is generally sustainable.
- Reinvestment Returns: Consider reinvesting some of your revenues to offset withdrawals and maintain your investment corpus.
- Matches financial goals: Adjust the amount and frequency of your SWP to meet your specific financial needs without putting any burden on the fund.
- Explaining inflation: Adjust withdrawal volumes regularly to respond to inflation and maintain purchasing power.
- Monitor fund performance: Check your funds regularly to perform and switch to a more performant fund if necessary.
- Take advantage of tax benefits: Choose long-term investments to benefit from a long-term decline in capital gains tax rates.
- Diversification of investment: Don’t rely solely on one mutual fund. Diversify across asset classes and fund categories to minimize risk.
- For example, investors can allocate 50% of their portfolios to equity-oriented funds and 50% to debt-oriented funds to balance risk and returns. You can also check it 10 mutual funds recommended by Grok AI There are funds based on different categories.
Conclusion: A systematic withdrawal plan is a powerful tool to generate normal income from mutual fund investments. By choosing the right fund, maintaining a moderate withdrawal rate and reviewing your plans regularly, you can enjoy stable cash flow while maintaining your wealth.
Happy investment in mutual funds!
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