Want Rs 25K income every month? Here's how it may be possible through systematic withdrawal plan (SWP)?

SWP Calculator: Before knowing what a systematic withdrawal plan (SWP) in a mutual fund is, let's understand a systematic investment plan (SIP). In a SIP investment, you deposit a certain amount every investment cycle on a predecided date to create a corpus. The longer you stay in our investment, the larger can be your corpus. A SWP is just its opposite. You invest a lump sum amount in a mutual fund(s) and withdraw a certain amount at a predecided date. It gives you a monthly income that lasts till your pool ends. You get regular income after the fund house sells net asset value (NAVs) from corpus and automatically transfers the amount into your bank account.

E.g. You deposit Rs 40 lakh in a mutual fund(s) and want to withdraw Rs 25,000 every month; for that, the fund house sells NAVs every withdrawal cycle and transfers its amount.

Like SIP, SWP also gives the benefit of rupee-cost averaging, where the fund house sells your NAVs at different prices.

If the rate of NAV is high, it sells fewer NAVs, if the NAV rate is low, it sells more NAVs. Since SWP is used as a way to get regular income, one can devise a way to get this pension lifelong, and at the same time, their corpus will also keep growing.

We will tell you about it through calculations.

However, before knowing that, let's go through some of the basics of SWP.

How does SWP work?

You deposit a lump sum amount in a mutual fund(s).

Your investment grows depending on the performance of your mutual fund schemes, and you withdraw a certain amount from the corpus every withdrawal cycle.

If your rate of withdrawal is less than the rate of growth, not only will you get a regular income, but your corpus will grow with time.    

E.g., if you have invested Rs 40 lakh in a lump sum in a scheme(s) and it grows at a CAGR of 10 per cent, and you decide to withdraw Rs 35,000 every month for 25 years, after 25 years, your total withdrawal will be Rs 1,05,00,000, but even then your corpus will grow to Rs 1,19,01,617 because of compounding returns.

After withdrawing your monthly income for 25 years, you will still have a Rs 14,01,617 balance.

How is monthly income calculated in SWP?

When you invest in a SWP mutual fund(s), you purchase NAVs. When you opt for a fixed amount every month, the fund house sells NAVs that match that amount.  

Can you get regular income even if your SWP investments turn negative?

If your invested funds are turning negative, you will surely get a regular income.

However, in that case, your fund will deplete quickly.

You will keep getting income till your corpus depletes completely.

However, the performance of mutual funds fluctuates.

It may go down for a year or two, but it is likely to recover at some point in time.

However, experts advise investing in debt as well as hybrid funds to get better output.

Won't your corpus deplete if you withdraw amount every month?

Surely, your pool of money will deplete.

But to get a regular income from it and make it keep growing, one can seek expert advice.

Experts ask you to invest in debt and hybrid funds to get better output. 

How I you get regular income without depleting your funds?

Describing how one can make the most of SWP investment, Adhil Shetty, CEO, bankbazaar.com, says, "There are a couple of things to keep in mind. One: the rate of withdrawal should be lower than the rate of growth. Two: It may be better in many cases to withdraw from a stable investment, such as a liquid fund. If you were withdrawing from a growth-oriented but less stable fund, such as an equity fund, there would be +40 per cent years and -20 per cent years now and then, and large withdrawals during the negative growth years would risk accelerating corpus exhaustion. Therefore, putting 1-2 years of income needs in the liquid fund would give you the required liquidity and prevent depletion in the bad years." 

How much should one withdraw every month?

Shetty says the bigger the gap between income and withdrawal, the better.

"An oft-quoted thumb rule is 4 per cent. But this is for low-inflation countries. In a high-inflation, fast-growing economy like India, a higher rate may be required."

What are the pros and cons of SWP investments?

Shetty says discipline is the key to making the most of SWP investments.

"The pros are that if you’re a disciplined and discerning investor, you can set your own withdrawal rate, rebalance the allocations, and never run out of money in retirement." Speaking about pros, he says, "The cons are that if you don’t know what you’re doing with your accumulated corpus, you may liquidate it inefficiently. This could cause corpus exhaustion, leaving you high and dry in retirement. The elderly may also be at risk of corpus depletion due to family dynamics or disputes." 

How can I have a monthly income of Rs 25,000 in a SWP?

As per the SWP calculator, if you get a return of 10 per cent on your investments and want a Rs 25,000 monthly income for the next at least 30 years, you need to invest Rs 30 lakh in a lump sum in mutual funds.

At a 10 per cent CAGR, your Rs 30 lakh corpus will grow to Rs 1,15,29,065.

Since you are withdrawing Rs 25,000 every month, your withdrawal amount in 30 years will be Rs 90,00,000, and the balance after that duration will be Rs 25,29,065. 

(Disclaimer: Investments in mutual funds are subject to market risks. Do your own research or consult your advisor before investing).