SWP or systematic withdrawal plan is an option to withdraw money regularly from your mutual fund investments. You can take out a fixed amount monthly, quarterly, half-yearly or annually. This is considered a good option for retirees who have no other regular income or individuals who need regular money from their lump sum investment.
However, investors should not consider this as a promised outcome. Mutual funds do not offer fixed or guaranteed returns. SEBI specifically notes that mutual fund investments are subject to market risks.
Can Rs 50 lakh provide Rs 30,000 monthly income for 20 years?
If a person wants to withdraw Rs 30,000 per month, they will take out Rs 3,60,000 per year, and Rs 72,00,000 in 20 years. This is Rs 22 lakh more than the person’s actual investment, as per the calculations. This is where returns work in mutual funds.
Rs 50 lakh investment: Estimated returns of 8% per annum
If you invest Rs 50 lakh and withdraw Rs 30,000 per month for 20 years, you will still be left with around Rs 62,34,814 after all the withdrawals. This means your actual investment remains more than what you invested.
Rs 50 lakh investment: Estimated returns of 12% per annum
If you invest Rs 50 lakh and withdraw Rs 30,000 per month for 20 years, you will still be left with around Rs 2,08,95,134 after all the withdrawals. This means your actual investment remains four times more than what you invested.
Why actual SWP returns can be very different
The calculations above assume that returns come at a steady rate every year. Real markets do not work like that. A mutual fund may gain strongly in one year and fall in another. This becomes particularly important in an SWP because money is being withdrawn continuously.
Suppose markets fall sharply during the first few years of the SWP. The fund would then need to sell more units to generate the same Rs 30,000 withdrawal. Those units are permanently removed from the portfolio and are no longer available to participate when markets recover.
This is known as sequence-of-returns risk and can make two investors earning similar long-term average returns experience very different outcomes.
For someone depending on the money for essential household expenses, keeping some money in less volatile assets rather than relying entirely on an equity fund can therefore be important.
How is SWP taxed?
An SWP is not treated in the same way as interest from a fixed deposit. Every withdrawal involves redemption of some mutual fund units. The tax liability arises on the capital gain component of the units redeemed rather than automatically on the entire withdrawal amount.
The applicable tax treatment depends on factors such as the type of mutual fund and how long the units were held. Capital gains from mutual fund redemptions therefore need to be considered while planning the actual post-tax monthly income.
Conclusion
But an SWP should not be confused with guaranteed monthly income. Market falls, poor returns during the early years, inflation, taxes and higher future withdrawals can all change the result significantly.
For investors using SWP for retirement income, the better approach is to decide the withdrawal amount after considering monthly expenses, emergency funds, inflation, investment mix, and the amount of capital they want to preserve for the future. That additional amount has to come from investment returns.
Our calculations are projections and not investment advice. Do your own due diligence or consult an expert for financial planning.