When we retire, we require a constant income since the monthly salary stops, but expenses go on even if responsibilities are reduced. Most people count on alternatives such as a pension, a fixed deposit, or the Senior Citizens Savings Scheme (SCSS), which provide regular interest or returns. These are safe, but at times, the rate of return might not increase your corpus sufficiently to build wealth along with fixed income.
This is where the Systematic Withdrawal Plan (SWP) from mutual funds comes in.
An SWP (Systematic Withdrawal Plan) works as the opposite of an SIP (Systematic Investment Plan). While SIP helps you invest a fixed amount regularly to build wealth over time, an SWP allows you to withdraw a fixed amount of money at regular, periodical intervals—whether monthly, quarterly, or annually—from your mutual fund investment.
Each time you withdraw, the fund automatically redeems a portion of your units to provide the payout, while the rest of your money stays invested and continues to grow with the market.
In short, SIP is about steadily growing your wealth, while SWP is about drawing a steady income from that wealth—without stopping it from working for you.
Advantages Of a Systematic Withdrawal Plan
- Withdraw Just the Way You Need
With SWP, you can decide how much money you would like to receive and how often (monthly, quarterly, or yearly). You only take out what you need, and the rest of your investment remains intact and continues to grow for your future.
- Let Your Money Keep Working, Even After You Withdraw
The balance corpus still remains invested in the selected mutual fund scheme, Even after you withdraw, your money continues to grow through compounding.
- Flexibility and liquidity
SWP lets you take out money whenever you need, giving you a regular income without touching your entire investment.
- Start Anytime, Not Just at Retirement
SWP You can start it at any time, it’s not only for retirement.
Why Do Investors Use SWP?
For Retirement Income: To generate a consistent monthly income in retirement, investors utilise SWPs. As a result, their remaining funds continue to increase and they are not limited to pensions or fixed savings.
For Educational Costs: Parents utilise SWPs to cover ongoing educational expenses such as living expenses, tuition, and housing costs. They have the option to withdraw their money gradually rather than all at once.
Freelancers & Business Owners – If income is irregular or uncertain, SWPs aid in generating a regular flow of funds. This makes you able to comfortably bear monthly bills until business improves or new income is received.
How SWP Works in Mutual Funds
- Have an Investment Fund in Place: To start a SWP, you need to have an existing investment in place. This fund serves as the source from which you can withdraw regularly. It could be your mutual fund investment (equity, debt, gold or hybrid), a fixed deposit (FD), a recurring deposit (RD), or any other suitable investment. Once set up, the SWP allows you to withdraw a fixed amount at regular intervals, offering both flexibility, steady cash flow and growth in your fund.
- Choose the Right Type of Fund: It’s usually advisable to initiate an SWP with a debt mutual fund. Why? Debt funds are risk-free and stable, so the money you receive is less likely to swing with market fluctuations. Equity funds, on the other hand, are volatile, and the value of your investment can fluctuate in the short term as per market volatility. This makes debt funds the preferred option for systematic withdrawals.
- Determine Your Withdrawal Level and Timing: Choose how much cash you wish to draw and how frequently monthly, quarterly, or annually. This guarantees a consistent income while leaving sufficient in the mutual fund to appreciate.
Let’s take an example,
Rhea and Sia both started their investments. Rhea started SIP (Systematic Investment Plan) in an equity mutual fund, investing ₹3,000 every month at an expected rate of 14% p.a.*. While Sia started investing ₹3,000 in RD (Recurring Deposit) for 20 years at 6.7% interest rate, both started investing at the age of 40 for 20 years until retirement at 60.
Retirement Fund at 60:
Rhea’s Fund: ₹39.49 Lakh
Sia’s Fund: ₹15.15 Lakh
Both want a monthly income during retirement for the next 20 years. Rhea is a smart investor, so she invests the accumulated amount in debt mutual fund and starts SWP (Systematic Withdrawal Plan), while Sia is a traditional investor, so she invests the accumulated amount in FD and opts for a monthly interest payout.
Let’s see how much both of them can withdraw for the next 20 years?
- Rhea – SWP (Debt Mutual Fund)
- Amount invested in Debt MF: ₹39.49 Lakh
- Expected rate of return: 7% p.a*.
- Monthly withdrawal: ₹20,000
- Years she will withdraw: 20 years
- Fund after 20 years of withdrawal: 54.42 Lakh
Key point: Even after withdrawing ₹20,000 per month, the corpus continues to grow and compound over time, ensuring Rhea has a sustainable income and a growing fund for the future.
- Sia – Fixed Deposit (FD)
- Corpus: ₹15.15 Lakh
- Interest rate: 6% p.a.
- Approximate monthly interest: ₹7,577
- Years she will withdraw: 20 years
- Fund after 20 years of withdrawal: 15.15 Lakh
Key point: Sia receives fixed income from interest, but her corpus remains the same throughout. After 20 years, the principal is still ₹15.15 lakh, with no growth and compounding.
*Mutual funds are subject to market risks, read all scheme related documents carefully
| Feature | FD / RD | Debt Mutual Fund SWP |
| Expected Interest/Returns | 5.25% – 7.25% p.a (Varies bank to bank) | 6% – 8% p.a. (market-linked, debt fund) |
| Interest / Payout | Interest credited monthly/quarterly/annually | Withdrawals as per SWP plan (monthly/quarterly/annually); remaining corpus continues to earn returns |
| Withdrawal Flexibility | Low; fixed interest payouts, premature withdrawal incurs a penalty | High; can withdraw monthly, quarterly, or annually as per requirement |
| Liquidity / Lock-in | Low; premature withdrawal incurs penalty (FD) | High; withdraw anytime as per SWP plan |
| Taxation | Fully taxable as per income slab | Tax applies only on capital gains |
| Suitability | Low-risk, capital-preserving investors | Investors seeking periodic income from debt with better liquidity and aim for growth & compounding |
The Taxation on Systematic Withdrawal Plans (SWP)
The tax treatment on SWP depends on the type of fund you invest in—equity, debt, or hybrid, as well as the holding period.
In summary, SWP offers a flexible and disciplined way to generate regular income while keeping your investments working and growing. It provides retirees, parents, and individuals with irregular income a sustainable method to meet expenses without depleting the corpus.
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FAQs
Who should consider using SWP?
Retirees or anyone else who needs a consistent income from mutual funds would benefit greatly from an SWP, which also offers flexible withdrawal options to help achieve both short- and long-term objectives.
Can I customize the withdrawal amount and frequency in an SWP?
You can change the withdrawal amount and frequency to monthly, quarterly, or annually in a Systematic Withdrawal Plan (SWP) to fit your needs.
What is the difference between SWP and SIP?
The major difference is that a SIP (Systematic Investment Plan) enables you to invest in mutual funds at regular intervals which enables you to create fund for yourself over a period of time, whereas a SWP (Systematic Withdrawal Plan) enables you to withdraw money at regular intervals to avail a consistent income.
Is SWP suitable for long-term financial planning?
Yes, an SWP is a tax-effective, disciplined method of getting regular income from investments with the balance continuing to be invested for growth. It’s perfect for financing long-term objectives such as retirement, education, or medical expenses.
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