Many investors want regular income from their mutual fund investment – similar to receiving a salary. For this mutual funds offer Systematic Withdrawal Plan (SWP).

Financial planners have suggested a better alternative to bank FDs, that is SWP in a debt mutual fund. A debt mutual fund offers the advantage of liquidity in case of emergencies along with better returns and lower tax.

Systematic Withdrawal Plan (SWP) is even better than a dividend plan offered by mutual fund schemes, as SWP lets you withdraw a fixed sum of money from a mutual fund scheme regularly.

Read more: Dividend vs SWP: 4 Reasons Why SWP Is Better Than a Dividend Plan.

How SWP Works for Regular Income?

Under SWP, if you invest a lump sum amount in a mutual fund, you can set an amount you’ll withdraw regularly and the frequency at which you’ll withdraw.

Let us look into how much amount you need to invest now to get a fixed salary of your choice for next 10 years.

For a Salary of ₹20,000

Let’s assume that you decided to withdraw an amount of ₹20,000 per month for next 10 years from the debt fund.

So, the amount you need to invest now is around ₹25 -27 lakhs in a lump sum in top 3 debt funds (mentioned in the table above) for getting a monthly salary of ₹20,000 over next 10 years.

For a Salary of ₹30,000

Let’s assume that you decided to withdraw an amount of ₹30,000 per month for next 10 years from the debt fund.

So, the amount you need to invest now is around ₹37 – 41 lakhs in a lump sum in top 3 debt funds for getting a monthly salary of ₹30,000 over next 10 years.

For a Salary of ₹45,000

Let’s assume that you decided to withdraw an amount of ₹45,000 per month for next 10 years from the debt fund.

So, the amount you need to invest now is around ₹56 – 61 lakhs in a lump sum in top 3 debt funds (mentioned in the table above) for getting a monthly salary of ₹45,000 over next 10 years.

For a salary of ₹50,000

Let’s assume that you decided to withdraw an amount of ₹50,000 per month for next 10 years from the debt fund.

So, the amount you need to invest now is around ₹67 lakhs in a lump sum in top 3 debt funds for getting a monthly salary of ₹50,000 over next 10 years.

For a Salary of ₹60,000

Let’s assume that you decided to withdraw an amount of ₹60,000 per month for next 10 years from the debt fund.

So, the amount you need to invest now is around ₹75 – 82 lakhs in a lump sum in top 3 debt funds for getting a monthly salary of ₹60,000 over next 10 years.

For a Salary of ₹75,000

Let’s assume that you decided to withdraw an amount of ₹75,000 per month for next 10 years from the debt fund.

So, the amount you need to invest now is around ₹94 lakhs – 1.01 crore in lump sum in top 3 debt funds for getting a monthly salary of ₹75,000 over next 10 years.

For a Salary of ₹1,00,000

Let’s assume that you decided to withdraw an amount of ₹1,00,000 per month for next 10 years from the debt fund.

So, the amount you need to invest now is around ₹1.25 -1.34 crores in lump sum in top 3 debt funds for getting a monthly salary of ₹1,00,000 over next 10 years.

For a Salary of ₹2,00,000

Let’s assume that you decided to withdraw an amount of ₹2,00,000 per month for next 10 years from the debt fund.

So, the amount you need to invest now is around ₹2.5 -2.7 lakhs in a lump sum in top 3 debt funds (mentioned in the table above) for getting a monthly salary of ₹2,00,000 over next 10 years.

**The expected returns taken above are as on 3rd May 2018 for calculating the corpus amount you needed for getting fixed salary for next 10 years. It is based on these fund’s past performance. The returns in mutual funds vary with time. The above returns are no guarantee of the fund’s future performance.

*** Inflation cost and tax to be paid is not considered in above calculation.

Use the above SWP calculator to know how much you can withdraw from your lump sum investments.

Calculate here: SWP (Systematic Withdrawal Plan) Calculator

How to Use SWP efficiently?

To invest in SWP more effectively, use following 2 tips:

  1. It is better to keep the monthly withdrawal between 2 to 3% below the expected return from the investments. In such case, periodic return from mutual funds is greater than the withdrawal rate, then the corpus wouldn’t reduce and you will be able to get fixed salary forever.
  2. If possible, give your investments some time to grow before starting an SWP, so that your monthly requirement can be met from the returns that you have earned from your investments. So, it is advisable to start an SWP after 1 year of investments in debt fund.

Read more10 Things You Need to Know About SWP (Systematic Withdrawal Plan): Monthly Income from Mutual Funds.

Top 3 Debt Funds for SWP

For starting SWP, debt funds are the best option.

Here’s the list of top 3 debt mutual funds for parking your lump sum amount in 2018, for getting a fixed salary for next 10 years.

1. Franklin India Ultra Short Bond Fund

This is an ultra-short bond fund launched on January 1, 2013. It is a debt fund with very low risk and has given a return of 9.53% since its launch.

Returns per annum over the years from this fund are:

Duration Returns
1 year  8.05%
3 years  9.10%
5 years  9.49%

Invest in Franklin India Ultra Short Bond Fund Now

Rating by Groww 5 star
AUM (Fund Size) ₹6,979 Cr
Minimum SIP ₹1,000
Minimum SWP ₹1,000
Performance w.r.t its Benchmark Has consistently outperformed its benchmark Crisil Liquid since its launch.
Age of the fund 5 years old
Expense Ratio 0.35%
Exit Load NIL
Type  Open-ended

This fund invests in short-term debt securities with some small portion in long-term securities. The returns in this category are similar to the returns offered by short-term funds.

2. Aditya Birla Sun Life Short Term Fund

This is a short-term debt fund launched on January 1, 2013. It is a debt fund with low risk and has given a return of 8.88% since its launch.

Returns per annum over the years from this fund are:

Duration Returns
1 year  6.36%
3 years  8.20%
5 years  8.77%

Invest in Aditya Birla Sun Life Short Term Fund Now

Rating by Groww 5 star
AUM (Fund Size) ₹19,445 Cr
Minimum SIP ₹1,000
Minimum SWP ₹1,000
Performance w.r.t its Benchmark Has consistently outperformed its benchmark Crisil Short-Term Bond since its launch.
Age of the fund 5 years old
Expense Ratio 0.26%
Exit Load NIL
Type  Open-ended

This scheme aims to generate current income and capital appreciation from a portfolio that invests 100% in debt and money market securities.

With an asset size topping ₹ 19,445 crores, the fund is the most popular fund in the category.

3. L&T Short Term Income Fund

This is a Short Term Fund type Debt Mutual Fund launched on January 1, 2013.

It is a fund with very low risk and has given a return of 8.83% since its launch.

Returns per annum over the years from this fund are:

Duration Returns
1 year  7.72%
3 years  9.07%
5 years  8.96%

Invest in L&T Short Term Income Fund Now

Rating by Groww 5 star
AUM (Fund Size) ₹1,241 Cr
Minimum SIP ₹1,000
Minimum SWP ₹500
Performance w.r.t its Benchmark Has consistently outperformed its benchmark Crisil Short-Term Bond since its launch.
Age of the fund 5 years old
Expense Ratio 0.58%
Exit Load If redeemed bet. 0 Month to 9 Month; Exit Load is 1%;
Type  Open-ended

The scheme aims to generate reasonable returns primarily through investments in fixed income securities and money market securities.

What is SWP?

SWP stands for Systematic Withdrawal Plan. SWP is the lesser-known twin of SIP (Systematic Investment Plan).

SIPs have gained immense popularity in India in recent times. SWPs does the reverse of what SIP.

In SIP, you invest an amount in a mutual fund regularly at a definite interval such as interval such as weekly, monthly, quarterly etc.,

Whereas in SWP, a fixed amount can be withdrawal at fixed intervals. Moreover, the frequency and amount of withdrawal can also be selected by the investor.

For example, if an investor has invested ₹50,000 in a scheme, he can set up an SWP to withdraw ₹5,000 every month on a specific date for 10 months.

So instead of eating into your savings, you can put it in a mutual fund (especially debt mutual fund) and withdraw regularly from it. This way, you can take only what you need and let the remainder of your money generate more wealth for you.

In general, SWP scores over dividend strategy on most fronts. However, SWP works better when a person has invested and accumulated a significant sum (with respect to the withdrawal one is seeking). In a small investment, if the return generated is less than the regular payouts, it will fast erode capital.

If the amount you withdraw is less than the amount your mutual fund generates, you can continue withdrawing from this fund forever.

Monthly Income Plan works out to be the best option for investors in need of regular flow of income. However, dividend option of monthly income plan doesn’t always guarantee regular stream of income. So, it is advisable to choose SWP option over dividend option.

These are some of the benefits of investing in mutual funds through SWP:

1. Surety of Fixed payout : A Systematic Withdrawal Plan (SWP) entails a stable payout to the investors at predetermined intervals. This implies that at some stage the investments will be completely repaid along with the gains.

2. Taxation : Apart from money market and liquid funds, a dividend distribution tax (DDT) of more than 12.5 % is deducted from dividend coming from debt funds. Whereas, in SWP, there is no dividend or any DDT thereof.

Also, SWP is more tax efficient as ₹1 lakh of LTCG is tax exempt, while dividends are taxed at a flat rate of 10%.

3. Avoid Market Risk: SWP helps to avoid the trap of market timing at the time of redeeming the equity mutual fund units: Just as systematic investment plans (SIP) avoid market risk at the time of investment, SWPs lower market risk at the time of redemption.

4. Financial Independence for Your Family Members : you can think of dedicating an SWP to a family member in need. Mutual fund houses have started offering you unique options to transfer money to your family members.

Recently, the SBI Mutual Fund launched Bandhan SWP—a unique facility that allows you to systematically withdraw money from your investments with the fund house and transfer it directly to the account of a beneficiary.

Read more: SBI Bandhan SWP: Financial Independence for Your Family

Things to Remember

The rates of return consider above are all past data. No one can predict the actual rate of return you will get on your investment.

You can only assume and predict the fund’s capability based on its past performance.

But don’t just run for returns from investment for investing in mutual funds. There are a lot of factors you should look into before selecting a fund which will match your investment goals.

Following the 3 things you should always remember before investing in Mutual Funds :

  1. Don’t blindly invest in the fund with the highest returns. Invest based on the duration you want to invest for.
  2. Every person’s financial condition is different. Evaluate the funds you invest in yourself – don’t invest in a fund because of its popularity.
  3. Review your investment from time to time but not too often. Once a few weeks is good enough.

Read More: 10 Tips on Investing in Mutual Funds

To look at some of the best performing funds from every category of mutual funds, check out Groww 30 best mutual funds to invest in 2018.

Happy Investing!

Disclaimer: the views expressed here are of the author and do not reflect those of Groww.