How an SWP (Systematic Withdrawal Plan) helps you generate regular income from your mutual fund

How an SWP (Systematic Withdrawal Plan) helps you generate regular income from your mutual fund

What is a systematic withdrawal plan?

A systematic withdrawal plan or SWP, is a mutual fund-related facility that allows investors to withdraw a fixed amount from their mutual fund investments at regular intervals. This process allows investors to use their mutual funds as a regular income-generating instrument.

When you set up the SWP on your mutual fund, you need to specify two important details: the amount of funds that you wish to withdraw periodically and the frequency of these withdrawals (monthly, quarterly, or annually).

Once the SWP process has been set up, the fund house will redeem a portion of the mutual fund to pay out your withdrawal amount at the specified intervals.

Key benefits of using a SWP

Here are some reasons why you should consider using a SWP as a tool to get recurring income from your mutual funds:

Flexibility: Unlike FDs or pension plans, systematic withdrawal plans offer a high level of flexibility over your mutual fund investment. You can change the frequency of withdrawal as well as alter the amount of funds that you wish to withdraw depending on your changing needs.

Capital appreciation with sustainable withdrawal: If you choose a sustainable rate of withdrawal at 4% to 6% of your corpus per year, then your investment will continue to grow and compound, given that the rate of returns from your mutual fund surpasses the rate of withdrawal of funds.

While you periodically withdraw money from your mutual funds, the remaining funds continue to grow in value, especially over a long period of time, thus increasing your capital amount.

Rupee cost averaging in reverse: The concept of rupee cost averaging helps investors make the most of their returns by buying more when prices are lower and less when prices are higher.

On the other hand, rupee cost averaging in reverse helps SWP users make the most of their mutual fund investments. When the market values are high, fewer units are sold to meet your withdrawal amount, and vice versa, which can help optimise your returns over time.

To conclude

Systematic withdrawal plans are an effective way to build a source of regular income from your mutual fund investments. By setting up a sustainable rate of withdrawal and choosing the right mutual funds that offer returns surpassing the withdrawals, you can ensure that your corpus continues to grow while you periodically withdraw funds for your expenses sustainably.

Moreover, it can be a good idea to review your mutual fund investment every few months as the returns can be volatile. If your chosen fund is no longer offering satisfactory performance, consider switching to a mutual fund with better returns. However, you should consult a financial advisor before making major investment decisions.