In times of uncertain markets and evolving financial needs, systematic withdrawal plans (SWPs) have emerged as a flexible tool for generating regular income without depleting savings.
SWP is a method of withdrawing a fixed amount of money from a mutual fund at regular intervals — monthly, quarterly, or annually. Instead of redeeming the entire investment at once, an SWP gives investors a steady, predictable income while the remaining corpus stays invested and grow.
“SWP is ideal for retirees, those funding children’s education or managing cash flows during a career break," Scripbox founder and CEO Atul Shinghal said.
How SWPs operate?
An SWP leverages compounding by keeping most assets invested. Vijay Maheshwari, founder of Stocktick Capital, uses a Rs 1-crore corpus in a growth-oriented mutual fund with an assumed 12 percent annual return to illustrate long-term wealth creation.
Setting up a Rs 25,000 monthly SWP with a 10 percent annual step-up redeems units equivalent to that amount each month. Over 20 years, total withdrawals reach Rs 1.17 crore, yet the corpus grows to Rs 5.95 crore as returns outpace outflows.
Setting the optimal withdrawal rate
Sustainability depends on keeping withdrawal rates low.
“A commonly used thumb rule is to keep annual withdrawals between 3 percent to 5 percent of the portfolio value, especially for retirement-oriented SWPs. This improves the chances that the corpus lasts longer and keeps pace with inflation,” Shinghal said.
Match your withdrawal frequency to your cash flow needs — monthly for everyday expenses, quarterly or yearly for planned outflows.
Also read | ETFs or index funds: Where should smart money really go?
Navigating tax implications
“Taxation under SWPs is based on capital gains, not on the entire withdrawal amount,” Shinghal said.
For equity-oriented funds (with at least 65 percent equity exposure), only the gains on redeemed units are taxed. Long-term capital gains above Rs 1.25 lakh are taxed at 12.5 percent on units held more than 12 months, while short-term gains are taxed at 20 percent on units held up to 12 months.
For debt-oriented funds, the capital gains component is taxed as per the investor’s income-tax slab, irrespective of the holding period.
For hybrid funds with equity exposure between 35 percent and 65 percent, capital gains on units held for more than two years are taxed at 12.5 percent, making them relatively tax-efficient for SWP-based income.
“This often makes SWPs more tax-efficient than fixed deposits, where the entire interest is taxed annually. Compared to annuities, SWPs offer more flexibility and potential inflation protection, though annuities provide certainty of income,” Shinghal said.
Key benefits for retirement and cash flow
SWPs offer a range of benefits that make them an attractive option for investors seeking regular income. It provides a predictable cash flow at chosen intervals, functioning like a pension for retirees.
“Investors can tailor withdrawal amounts and frequency to match their lifestyle or financial needs, offering flexibility. The remaining corpus stays invested, providing growth opportunities unlike fixed deposits or annuities,” Maheshwari said.
Withdrawals are treated as redemptions, so only gains are taxed, making it a tax-efficient option.
“Equity or hybrid exposure helps protect purchasing power over time, acting as an inflation hedge,” he said.
A structured withdrawal mechanism reduces impulsive redemptions and ensures orderly cash flow, providing discipline.
Shinghal said, "Investors can choose the withdrawal amount, change it over time, or even pause it." For non-retirees, it supplements salaries or bridges career gaps, combining flexibility and tax efficiency over traditional products.
Also read | How NPS contributions cut your income tax under both old and new regimes
SWP vs fixed deposits and annuities
SWPs from mutual funds offer flexible, market-linked returns (10-15 percent plus per annum) with tax-efficient withdrawals, high liquidity, and inflation protection. Fixed Deposits provide fixed, low-risk returns (6-7 percent) with penalties for early exit.
Annuity plans offer guaranteed income (5.5-7.5 percent) but with low flexibility and no capital growth. SWPs suit long-term income needs, FDs suit short-term goals, and annuities suit guaranteed lifetime income.
Mitigating inherent risks
“Market volatility poses a risk to SWPs, as downturns may require selling more mutual fund units to meet withdrawal demands, potentially depleting your corpus faster than anticipated,” said Maheshwari.
Additionally, the sequence of returns risk can be detrimental if poor market performance early in the withdrawal phase combines with withdrawals, causing lasting damage to the portfolio, even if markets rebound later.
Shinghal said, "The biggest risk is withdrawing too much, too early." Underperformance may necessitate cuts or conservative shifts. So, combine diversification, conservative assumptions, and regular reviews to manage outliving savings.
Ideal mutual fund categories for SWPs
Mutual fund category choice depends on time horizon, risk tolerance, and income certainty.
Maheshwari recommends balanced advantage funds for dynamic allocation reducing volatility; conservative hybrids for debt-heavy safety; equity savings for arbitrage-blended efficiency; multi-asset for diversification; and large-cap/flexi-cap as growth supplements.
The SWP strategic edge
If executed smartly, SWPs transform withdrawals into a holistic strategy for long-term financial stability. As Shinghal said, "When planned thoughtfully, SWPs can provide regular income, manage taxes efficiently, and keep money working over long periods. The key lies in realistic withdrawal rates, suitable fund selection, and periodic reviews."
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
