Hello friends! Today, we’ll explore a popular question: “How can we earn a steady monthly income with SWP?” The Systematic Withdrawal Plan (SWP) can provide regular income from your mutual fund investments, just like a monthly salary. But many find SWP complex. Here, I’ll explain it in the simplest way possible, and by the end, I’ll share some recommended funds for SWP.
What is SWP?
Imagine you have a magical piggy bank where you’ve been saving money over time. As you add money, it doesn’t just sit there — it grows. Suppose you put in ₹1,000, and with a little magic, it becomes ₹1,100. Now, imagine investing in this magical piggy bank for 10 years, sometimes putting in ₹1,000, sometimes ₹2,000. Over time, let’s say you save ₹1 lakh, and the magic grows this into ₹5 lakhs.
Now, you want to start getting a monthly income. You ask your piggy bank to give you ₹1,000 every month. So, even though you’re withdrawing, the remaining amount continues to grow. This idea of withdrawing a fixed amount every month, without depleting your savings immediately, is the core of SWP.
How Does SWP Work?
SWP allows you to withdraw a fixed amount each month from your mutual fund. Here’s a real example using a hypothetical Balance Advantage Fund to show how SWP works:
- Initial Investment: Suppose you invest ₹50 lakhs in a mutual fund. You have 50,000 units, each unit worth ₹100 (known as the NAV or Net Asset Value).
- Monthly Withdrawal: You start withdrawing ₹30,000 monthly.
- Market Growth: Over the year, the fund grows and the NAV increases. Even after withdrawing ₹30,000 each month, by year-end, your investment grows from ₹50 lakhs to ₹53.1 lakhs, thanks to returns on the remaining units.
How Much Should You Invest in SWP?
To get regular income from SWP, you need a substantial corpus (or total investment). For example, if you have ₹50 lakhs, you can easily withdraw ₹30,000 monthly without affecting your original amount. But if you don’t have a large corpus, consider building one over time.
Creating a Corpus with SIP
You can start with a Systematic Investment Plan (SIP) to build a corpus over the years. Suppose you aim to have ₹1 crore in 20 years. By investing ₹10,000 monthly in SIP for 20 years, with a 12% average annual return, you could reach that goal. Then, you could withdraw ₹50,000 monthly through SWP, while your portfolio continues to grow.
How Much Can You Withdraw with SWP?
Typically, if you want your corpus to last, keep your withdrawal rate at around 6% annually. For example, if you have ₹1 crore and withdraw ₹50,000 monthly (6% yearly), your investment may still grow at around 8-10% annually, offsetting the withdrawals.
Setting Up SWP – Is It Complicated?
Setting up SWP is simple! Just log into your mutual fund platform or app, select SWP, and choose the fund and withdrawal amount. Most apps and websites offer this option, making SWP as easy as SIP.
Tax on SWP Withdrawals
Withdrawals from SWP are subject to Long-Term Capital Gains (LTCG) tax. But don’t worry too much — by the time you start SWP, you’ll have a solid understanding of how it works, including the tax implications.
Best Mutual Funds for SWP
Here are some popular types of funds for SWP:
- Balance Advantage Funds: These funds balance equity and debt, providing stable returns with moderate risk.
- Equity Savings Funds: Suitable for those looking for both growth and income.
- Debt Mutual Funds: Ideal for conservative investors who prioritize safety over high returns.
Final Thoughts
SWP is an excellent option for those looking to turn their investments into a steady income source. With careful planning and the right fund choice, you can enjoy a fixed monthly income without worrying about exhausting your corpus.