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Beta, retirement ke baad sirf aaram nahi… income bhi chahiye – My Father
These simple words from a retired father highlight a deep concern shared by many: What happens to regular income once the job ends?
After decades of working and building a secure future for their families, many retirees struggle with a sudden pause in their monthly cash flow. Pension and fixed deposit interest may not always be enough to manage expenses or maintain the same lifestyle. That sense of being unemployed after retirement can feel emotionally and financially unsettling.
But what if your investments could provide you with a regular monthly income, just like your salary once did?
That’s where a Systematic Withdrawal Plan (SWP) comes in. SWP is a feature offered by mutual funds that allows you to withdraw a fixed amount from your investment every month. It’s not a loan or a policy, it’s your own money working for you, giving you financial independence even after retirement.
In this blog, we’ll explain:
- What is SWP and how it work?
- How to generate a second income from your existing mutual fund investments?
- Who should consider SWP- retirees, part time professionals or anyone looking for passive income?
- Benefits of SWP and soo many things…
So,
Let’s explore how you can turn your retirement savings into a stable, reliable income without the pressure of work or the need to depend on others.
What is SWP in Mutual Funds?
When it comes to financial planning, most investors are familiar with SIPs (Systematic Investment Plans) for regular investments. But what if you want to withdraw money from your mutual fund investments at fixed intervals? That’s where SWP comes into play.
SWP is a smart facility offered by mutual funds allows investors to withdraw a fixed amount from their investments at regular intervals, monthly, quarterly or annually as per their convenience. Unlike lump sum withdrawals, SWP offers structured and automated payouts, making it a best choice for those seeking a steady income during retirement.
One of the biggest advantages of SWP is its flexibility. Investors can decide both withdrawal amount and frequency. You even have the option to redeem only the gains earned on your investments, while keeping your principal amount intact so that it continues to grow. And the selected amount is redeemed on your chosen date based on prevailing NAV and the equivalent amount is directly transferred to your bank account, without any manual follow ups or additional processes.
Remember, SWPs are available only in open ended mutual fund schemes, whether it is equity, debt or hybrid. There is no lockin period and investors have full control with the ability to pause or stop the SWP at any time.
However, SWP ensures regular income and liquidity, it’s also important to understand how it affects your taxes. After all, every time you withdraw, a few units of your mutual fund are redeemed, which may have tax implications depending on your holding period and the type of fund. Regarding tax we will cover later in this blog.
How Does SWP Work?
A SWP is quite a simple concept once you understand the mechanism. Here’s how it works step by step:
- Start with a Corpus: First you need to have a lump sum invested in a mutual fund. This can be either through a one time investment or through regular SIPs over time.
- Set Up SWP: Then you instruct the fund house to transfer a fixed amount from your mutual fund to your bank account at regular intervals, monthly, quarterly, half yearly or annually. The power is in your hands, you choose how much you want to withdraw and how often. This makes SWP a fully customizable income strategy.
- Units Are Redeemed Based on NAV: On your selected withdrawal date, mutual fund company redeems as many units from your fund as needed to match your specified amount. This redemption is done at the current NAV.
- Money Gets Transferred Like a Salary: The amount is then credited directly to your bank account, just like receiving a monthly salary.
- Remaining Investment Keeps Growing: Units that are not redeemed stay invested in the market. They continue to grow or fluctuate based on the market’s performance.
- Ongoing Process: This cycle continues until you either stop the SWP manually or the balance in your mutual fund runs out.
After 1 month, NAV was trading at ₹102. To transfer ₹10,000 in Sharma Ji’s account, fund house had to…
- ₹10,000 ÷ ₹102 = 98.04 units redeem approximately
- Units left: 10,000 – 98.04 = 9,901.96 units
- Value of remaining units: 9,901.96 × 102 = ₹10,10,000
- Mr. Sharma got ₹10,000 income + his investment grew by ₹10,000
After 2nd months, NAV was trading at ₹105. To transfer ₹10,000 to Sharma Ji’s account, fund house had to…
- ₹10,000 ÷ ₹105 = 94.30 units redeem approximately
- Units left: 9,901.96 – 94.30 = 9,807.66 units
- Value of remaining units: 9,807.66 × 105 = ₹10,29,804
- Again, ₹10,000 credited + further growth in investment
After 3rd months, NAV was trading at ₹101. To transfer ₹10,000 to Sharma Ji’s account, fund house had to…
- ₹10,000 ÷ ₹101 = 99 units redeem Approx
- Units left: 9,807.66 – 99 = 9,708.66 units
- Value of remaining units: 9,708.66 × 101 = ₹9,80,574
- Income credited, but investment value dropped slightly due to market volatility
After 4th months, NAV was trading at ₹99. To transfer ₹10,000 to Sharma Ji’s account, fund house had to…
- ₹10,000 ÷ ₹99 = 101.01 units redeem Approx.
- Units left: 9,708.66 – 101.01 = 9,607.65 units
- Value of remaining units: 9,607.65 × 99 = ₹9,51,157
- ₹10,000 income credited again but investment value declined further
After 5th months, NAV was trading at ₹100.50. To transfer ₹10,000 to Sharma Ji’s account, fund house had to...
- ₹10,000 ÷ ₹100.50 = 99.50 units redeem karne pade
- Units left: 9,607.65 – 99.50 = 9,508.15 units
- Value of remaining units: 9,508.15 × 100.50 = ₹9,55,569
- Income credited + investment value stabilized
After 6th months, NAV was trading at ₹106. To transfer ₹10,000 to Sharma Ji’s account, fund house had to…
- ₹10,000 ÷ ₹106 = 94.34 units redeem karne pade
- Units left: 9,508.15 – 94.34 = 9,413.81 units
- Value of remaining units: 9,413.81 × 106 = ₹9,97,863
- ₹10,000 credited again + investment almost back to ₹10 lakh
- Total income received by Sharma Ji: ₹10,000 × 6 = ₹60,000
- Remaining units: 9,413.81
- Current investment value: ₹9,97,863
- Total wealth = ₹60,000 (income) + ₹9,97,863 (investment) = ₹10,57,863
- Net gain = ₹57,863
What Did We Learn?
- Mr. Sharma received a regular monthly income of ₹10,000
2. Despite market ups and downs, his investment grew over 6 months
3. SWP gave him the benefit of income + growth, without needing to time the market
- Mr. Sharma received a regular monthly income of ₹10,000
You can see the complete calculation in this table.
| Month | NAV (₹) | Withdrawal (₹) | Units Redeemed | Remaining Units | Fund Value (₹) |
|---|---|---|---|---|---|
|
Start
|
100.00 |
0 |
0 |
10,000.00 |
10,00,000 |
|
1 |
102.00
|
10,000 |
98.04 |
9,901.96 |
10,10,000 |
|
2 |
105.00
|
10,000
|
94.30
|
9,807.66
|
10,29,804
|
|
3 |
101.00
|
10,000 |
99 |
9,708.66 |
9,80,574 |
|
4 |
99.00
|
10,000
|
101.01
|
9,607.65
|
9,51,157
|
|
5 |
100.50
|
10,000
|
99.50
|
9,508.15
|
9,55,569
|
|
6 |
106.00
|
10,000
|
94.34
|
9,413.81
|
9,97,863
|
Understanding 4% Withdrawal Rule in SWP
So far, we’ve discussed how an SWP can be used smartly, but it’s also important to understand 4% Withdrawal Rule.
This rule is a helpful for planning a comfortable and long lasting retirement. It suggests you should withdraw only 4% of your total retirement corpus each year. By doing this, your money is more likely to last for 30 years or even longer.
Example:
If you have a retirement corpus of ₹1 crore, withdrawing 4% annually means you take out ₹4 lakh in a year, roughly ₹33,333 per month.
This rule is based on historical market data, which shows sticking to the 4% withdrawal rate helps maintain your investment over the long term, even through market ups and downs. That’s why it’s often called a sustainable withdrawal rate.
- Regular Income with Flexibility
SWP allows you to withdraw a fixed amount from your mutual fund investments at regular intervals, like monthly or quarterly. This becomes a reliable source of income, supporting your financial planning after retirement.
Unlike a Bank FD or annuity, your entire capital isn’t locked in. The amount that stays invested continues to grow based on market performance. So while you withdraw a part regularly, the remaining capital keeps compounding, helping you build wealth and even beat inflation over time.
- Full Control Over Withdrawals
SWPs offer flexibility. You can increase, decrease or even stop the withdrawals as per your needs. In case of emergencies, you can request additional redemptions. Compared to traditional instruments like Fixed Deposits, such flexibility is a big advantage.
- Benefit from Market Upside
During a bull market, most investments perform well. If your SWP withdrawals are lower than the returns your mutual fund generates, your overall investment lasts longer. Plus, by withdrawing profits at regular intervals, you’re able to book gains and turn paper profits into real money, while keeping your income steady.
- Create Your Own Pension
If you don’t have a pension plan, no worries. You can create one for yourself using SWP. Invest your retirement corpus into mutual funds that suit your risk profile, whether it is debt, hybrid or balanced funds. Then, choose a fixed withdrawal frequency. This setup gives you a steady flow of income post retirement, much like a pension.
- Tax Treatment of SWP
Let’s also touch upon the tax angle, which is a common concern.
As per the rules applicable from July 23, 2024, capital gains from mutual funds are classified into three categories based on fund type, holding period and applicable tax rates.
| Type of Mutual Fund | Short-Term Capital Gains (STCG) | Long-Term Capital Gains (LTCG) | Taxation |
|---|---|---|---|
|
Equity funds and aggressive hybrid funds (Invest over 65% in equity) |
If held for less than 12 months |
If held for 12 months or more |
STCG taxed at 20%, LTCG taxed at 12.5% (without indexation) |
|
Debt funds and conservative hybrid funds(Invest 35% or less in equity) |
No effect of the holding period |
No effect of the holding period |
All gains are taxed as per investor’s income tax slab
|
|
Other hybrid funds (Invest more than 35% but less than 65% in equity). If invested after April 1, 2023 |
No effect of the holding period
|
No effect of the holding period |
All gains are taxed as per investor’s income tax slab. No LTCG benefit or indexation. |
- Benefit of Rupee Cost Averaging
If you invest in mutual funds, you’ve probably heard the term Rupee Cost Averaging.
You invest or withdraw a fixed amount at regular intervals, regardless of whether the market is up or down. This helps reduce the impact of market volatility on your investments. Over the long term, it can lead to a lower average cost per unit (in case of SIPs) or more consistent returns (in case of SWPs).
- Let’s understand how Rupee Cost Averaging works with SIPs
When the market is down, your fixed investment amount buys more units because the price per unit is low. When the market goes up, the same amount buys fewer units. Over time, this process reduces your average cost per unit. So, when the market recovers, you already own more units that can gain value, leading to better long term returns.
Now let’s look at how Rupee Cost Averaging works with SWPs
In this case, the logic works in reverse. You redeem a fixed amount at regular intervals. When the market is high, fewer units need to be sold to meet the withdrawal amount. When the market is low, slightly more units are sold. This helps balance your average sale price, providing a more stable and predictable income stream.
- Now let’s understand Rupee Cost Averaging with an example, so let’s meet Rajeev and Rajesh.
Rajeev’s Investment:
Rajeev invested ₹5 lakh in a mutual fund scheme in April 2019. At that time NAV of the scheme was ₹500.
So, Rajeev received:
₹5,00,000 ÷ ₹500 = 1000 units
Over time, NAV of the mutual fund changed as follows:
| Month | NAV (₹) |
|---|---|
|
April |
500 |
|
May |
515 |
|
June |
510 |
|
July |
525
|
|
August |
530 |
|
September |
498 |
After 5 months, Rajeev decided to withdraw ₹2.5 lakh from his investment in one go. At the time of this withdrawal in September, NAV was ₹498.
So the number of units redeemed: ₹2,50,000 ÷ ₹498 = 502 units
This means:
Rajeev originally held 1000 units. After redeeming 502 units, he is left with: 1000 – 502 = 498 units
And the value of his remaining investment: 498 units × ₹498 NAV = ₹2,48,004
Rajesh’s Investment
Now let’s look at how Rajesh’s investment worked.
Rajesh also invested ₹5 lakh in the same mutual fund scheme at the same time, with the same NAV of ₹500. He also received 1000 units. However, Rajesh chose SWP, under this plan, he withdrew ₹50,000 every month for 5 months.
Let’s now see how this SWP method impacted his investment:
SWP Table: Rajesh’s Withdrawal with Rupee Cost Averaging
| Month | NAV (₹) | SWP Amount (₹) | Units Redeemed | Units Left | Remaining Fund Value (₹) |
|---|---|---|---|---|---|
|
April
|
500 |
- |
- |
1000 |
5,00,000 |
|
May |
515 |
50,000
|
97
|
903 |
4,65,045 |
|
June |
510 |
50,000 |
98 |
805 |
4,10,550 |
|
July |
525 |
50,000 |
95 |
710 |
3,72,750 |
|
August |
510 |
50,000 |
94 |
616 |
3,26,480 |
|
September |
498 |
50,000 |
100 |
516 |
2,56,968 |
As you saw in the table
Rajesh redeemed units at every NAV level, whether the market went up or down.
As a result, his average sale price got balanced and he still holds 516 units today. His current fund value is ₹2,56,968 and that’s after withdrawing ₹2.5 lakh over 5 months. On the other hand, Rajeev has 498 units left and his current fund value is ₹2,48,004.
So as you can see, Rajesh received a fixed income through SWP and also benefited from value appreciation. Whereas Rajeev withdrew ₹2.5 lakh in one go and thus missed out on the benefit of Rupee Cost Averaging.
How to use SWP Smartly
- Creating a Regular Secondary Income Source
In today’s time, relying on just one income source is not enough. With rising inflation, everyone needs an additional source of income. If you’ve invested in mutual funds, you can withdraw a small amount every month through SWP and create a reliable secondary income. The biggest advantages of this approach are:
- You won’t need to withdraw a lump sum amount at once.
- Your investment will still have a chance to grow (as long as the returns are higher than your withdrawals).
- A steady monthly cash flow will also improve your overall financial stability.
- Creating Your Own Pension Plan
Whether or not you have a formal pension plan, you can build a personalised retirement income plan for yourself.
- First, build a strong investment corpus before retirement.
- Invest this corpus in a mutual fund scheme that matches your risk profile.
- Once you retire, start an SWP where a fixed amount is credited to your bank account every month, just like a pension, but completely under your control.
How to Plan SWP Perfectly?
- First, decide how much income you need from the fund every month and for how many years. Based on this, calculate the total corpus you will require. You can also use online SWP calculators for this.
- Next, you need to choose one of the three fund categories based on your risk profile:
- Equity Funds (Growth oriented): These are suitable for aggressive investors who want capital appreciation over the long term. However, these mutual funds come with higher risk.
- Balanced/Hybrid Funds: These funds invest in a mix of equity and debt. The risk level here is moderate, making them ideal for investors who want growth and stability. They provide a balanced approach, neither too risky nor too low in returns.
- Debt Funds (Stability oriented): This category is best for conservative investors who want to protect their capital. Returns tend to be lower but volatility is minimal.
- Also, regularly review your SWP because market conditions, inflation and your personal needs change over time. Therefore, keep checking your withdrawal amount periodically and make adjustments whenever necessary.
Is SWP Right for You?
Many people think SWP is only for retired individuals but in reality, it is useful for anyone who wants regular income from their investments without withdrawing the entire amount. Here are some examples of people for whom SWP can be very helpful:
- Retired individuals who want a fixed monthly income from their savings.
- Investors who have accumulated a large corpus and now want to generate steady cash flow from it.
- Parents who need to cover regular expenses like their children’s education, coaching fees or other costs.
- Freelancers or self employed professionals whose income is not fixed every month and who need a stable cash flow.
- People looking to boost their income beyond their pension or rent by expecting some extra regular income.
SIP vs SWP (Systematic Investment Plan vs. Systematic Withdrawal Plan)
Now let’s break down the difference between SIP and SWP.
| Criteria | SIP (Systematic Investment Plan) | SWP (Systematic Withdrawal Plan) |
|---|---|---|
|
Purpose
|
To accumulate wealth by investing regularly |
To withdraw money at regular intervals |
|
Cash Flow Direction
|
Money goes from the bank account to the mutual fund |
Money comes from a mutual fund to a bank account |
|
Suitable For |
Early stage investors, salaried individuals |
Retirees, income seekers and phased withdrawals |
|
Investment Style
|
Monthly, quarterly or custom instalments |
Monthly, quarterly or custom withdrawals |
|
Corpus Requirement
|
No significant capital needed; starts with small amounts |
Requires a built up fund (via SIP or lump sum) |
|
Main Goal |
Long term capital growth |
Regular income from existing investments |
|
Risk Exposure |
Market risk during the accumulation phase |
Market risk during the withdrawal phase |
|
Time Horizon
|
Long term (5–10 years or more)
|
Medium to long term, based on corpus size
|
|
NAV Impact
|
Units bought as per NAV on the SIP date
|
Units sold based on NAV on the withdrawal date
|
|
Flexibility
|
Can increase/decrease the SIP amount anytime
|
Can modify, pause or stop withdrawals anytime
|
|
Entry Point
|
Anytime with a minimal amount (as low as ₹500) |
Anytime with a minimal amount (as low as ₹500) |
|
Emotional Discipline Needed
|
Yes - SIPs need patience to see results
|
Yes - SWP needs control to avoid over withdrawing
|
|
Investor Control
|
Complete control over amount, frequency and pause/start
|
Complete control over amount, frequency and pause/start
|
So as you saw, SWP is not just a withdrawal plan, it’s actually a smart financial strategy. Whether you’re looking for a steady income after retirement or simply want to boost your existing income, SWP can be a useful option in both situations.
Happy investing and thank you for reading!
Disclaimer:
This website content is only for educational purposes, not investment advice. Before making any investment, it’s important to do your own research and be fully informed. Investing in the stock market includes risks, and you should carefully read the Risk Disclosure documents before proceeding. Please remember that past performance doesn’t guarantee future results, and due to market fluctuations, your investment goals may not always be achieved.
