The amount invested in mutual funds can be turned into a regular income when the need for growth shifts towards stability and regular income. When investing in something, at some point in time, returns do need to show up in the bank account, and not just in statements. So, how do we actually turn invested money into stable income?
A Systematic Withdrawal Plan (SWP) helps to achieve exactly this. An SWP allows the investors to withdraw a fixed amount of money from mutual funds at set intervals while the remaining money stays invested. It involves picking the right fund, deciding on how much to withdraw, and matching the timing with monthly requirements. To utilise the benefits of SWP, investors need to understand how units are redeemed and how the withdrawals affect long-term returns.
Learn how to invest in SWP, with explanations, practical steps, taxation details, and compare SWP vs SIP, in this blog!
What is SWP?
Systematic Withdrawal Plan (SWP) is a mutual fund option that investors adopt in order to withdraw a fixed amount of money at regular intervals, usually monthly. SWP generates an income flow and turns investment into a regular paycheck, while keeping the rest of the money invested for growth. It is mostly used by retirees, as only the amount and frequency are required to be set, and the fund automatically redeems units.
Imagine Mr Ravi, who invested his gratuity of ₹1.5 Crore in a SWP mutual fund plan, with an expected return of 9%. He withdraws units worth ₹53,000/month for the next 5 years to cover basic expenses.
Here’s how the calculation flows:
Interest = Investment Value x (9% ÷ 12 months)
So month 1 interest = ₹1,49,47,000 x (9% ÷ 12) = ₹1,12,025
| Month | Investment value before withdrawal (₹) | Monthly withdrawal (₹) | Investment value after withdrawal (₹) | Interest Earned (₹) |
| 1 | 1,50,00,000 | 53,000 | 1,49,47,000 | 1,12,025 |
| 2 | 1,50,59,025 | 53,000 | 1,50,06,025 | 1,12,545 |
| 3 | 1,51,18,570 | 53,000 | 1,50,65,570 | 1,12,992 |
| 4 | 1,51,78,562 | 53,000 | 1,51,25,562 | 1,13,441 |
Over 5 years, he withdraws ₹31,80,000 in total, while the remaining corpus stays invested and continues to earn returns alongside the withdrawals.
Steps to Start Investing in SWP
Step 1 – Select the Mutual Fund: Identify the mutual fund scheme from which the withdrawals are to be initiated.
Step 2 – Decide on the withdrawal details: The parameters for withdrawals, such as the amount, frequency, starting date, and total duration, shall be decided next.
Step 3 – Fill out the SWP request form: Investors can do this digitally through the online platform or the fund house’s website, or physically by submitting a form, with details like folio number, fund name, and the withdrawal specifics.
Step 4 – Provide bank account details: Investors need to link a bank account with the correct information, as the withdrawn amounts will be credited directly there.
Step 5 – Submit and activate: The final step is to review all details and submit the request, and the fund house will process the instructions and activate the plan.
Benefits of SWP for Investors
- Stable on schedule cash flows: SWP delivers fixed payouts at regular intervals. It provides means to retired employees and freelancers looking for consistency and even income.
- Built around cash requirements: The investors can control the withdrawal amount and frequency, which is flexible enough to be adjusted, paused, or stopped when life changes.
- Withdraw while staying invested: Since only a portion of the investment is withdrawn each time, the remaining money stays in the market, which helps the portfolio grow over time.
- Handles taxes: The tax applies only to the capital gains within each withdrawal, not on the full payout. While equity SWPs benefit from long-term exemptions, with no TDS for resident investors.
SWP vs SIP: Key Differences
| Features | Systematic Investment Plan (SIP) | Systematic Withdrawal Plan (SWP) |
| The Idea | It is a systematic investment that builds wealth over the long-term by investing regularly, where the money flows from the bank account into the mutual fund. | SWP provides a stable and reliable income stream from accumulated wealth, where the money flows from the mutual fund into the bank account. |
| Match Made For | It is suitable for salaried individuals, young investors, or anyone in their earning years looking to build a corpus. | It is suitable for retirees, senior citizens, or those needing cash flow for monthly expenses. |
| Market Impact | It benefits from rupee cost averaging, which reduces the impact of market volatility. | The remaining corpus stays invested and is still subject to market risk and depletion if withdrawals are too high. |
| Taxation | Tax is applicable at the time of redemption, depending on fund type and holding period. | Each withdrawal is considered a redemption and the capital gains portion is taxed based on the fund type and holding period. |
How to Choose the Best SWP Option
- Know what the money is for: Start by linking the withdrawals to real needs such as monthly living costs, loan payments, or future education bills. The comfort level with risk should decide how aggressive or stable the fund choice is.
- Match the fund to risk comfort: The hybrid funds provide a middle ground between stability and growth. The debt funds provide predictability, while equity funds make sense only when the timeline is long and market swings are manageable.
- Strategic withdrawals: The investors should set a reasonable amount and frequency that supports expenses without pulling too much out, to protect the remaining investment.
- Consider tax impact: The tax rules are based on fund type and how long the money stays invested, and long-term holdings usually face a lower tax pressure than short-term exits or fixed deposits.
Takeaway
A Systematic Withdrawal Plan works best when income planning matters as much as growth. It allows investors to draw regular cash from mutual funds without exiting completely. With the right fund choice, sensible withdrawal limits, and tax awareness, SWP can convert long-term investments into steady income while keeping the remaining corpus invested.
FAQ‘s
A Systematic Withdrawal Plan is a mutual fund facility that allows investors to withdraw fixed amounts at fixed intervals. Rather than selling the entire investment at once, units are redeemed gradually for each withdrawal, while the rest remains invested.
In order to start an SWP, first, the investors need to invest in a mutual fund scheme. Once the investment is in place, they choose the withdrawal amount, frequency, and start date. The request can be submitted online or through the fund house, after which withdrawals are credited directly to the linked bank account.
SWP provides predictable income, flexibility in withdrawals, and better control over the cash flows. Since only a portion of the investment is redeemed, the remaining amount stays invested. It can also be more tax-efficient than traditional income options, especially when withdrawals are planned efficiently over time.
SIP focuses on building wealth by investing money regularly into mutual funds. SWP does the opposite by withdrawing money from existing investments at set intervals. SIP suits earning years when accumulation matters, and SWP is useful when income generation becomes a priority from an already built corpus.
Yes, SWP withdrawals are taxable, but only the capital gains portion is taxed, not the full withdrawal amount. The tax rate depends on the type of fund and how long the units were held. The equity funds usually get favourable long-term tax treatment compared to debt or short-term holdings.
