Retirement Planning is an important exercise where you plan how you will get lifelong regular income. It is the end of the paycheck for the salaried. As retirement is an event that is certain and expected after few or more years, it is important to make an investment habit. If you are an investor who has created a sizable amount of mutual fund portfolio, this post is for you. In this post, we will take a look at Systematic Withdrawal Plan (SWP).
SWP is a method to get steady monthly income from your mutual fund corpus with less impact on growth of the remaining fund.
If you are nearing your retirement age with mutual fund portfolio worth ₹3 crore, and if you wish to know how SWP really works, how much monthly income can be earned from it and for how long, this article shall take you through its basics in a step-by-step manner.
What Is an SWP?
A Systematic Withdrawal Plan is a facility offered by mutual funds that allows an investor to withdraw a pre-decided amount from their investment at regular intervals — typically monthly, though quarterly or annual options also exist. Unlike a lump-sum withdrawal, SWP redeems only a specific number of units each time, letting the rest of the corpus remain invested and continue earning returns.
Systematic Withdrawal Plan is a scheme of the mutual fund where an individual can withdraw an agreed sum of money from his/her investment after certain fixed periods, which can be monthly, quarterly, or annually. While a lump sum withdrawal involves withdrawing all the money at once, SWP only involves withdrawing a fixed number of units at each withdrawal session.
imagine your corpus to be a bucket containing water and you start taking out water from this bucket slowly with small pipe (money using SWP) while big pipe return is adding more water at a faster pace.
SWP can be seen as the opposite of a Systematic Investment Plan or SIP. While SIP helps accumulate wealth through a fixed periodic investment, SWP helps in distributing wealth in the form of a fixed (or sometimes even a variable) periodic withdrawal while the corpus still earns for you.
How Much Monthly SIP Creates a Rs 2 Crore Corpus in 10 Years?
How SWP Works
- You make an initial investment (or even move an existing corpus) in a scheme of mutual funds.
- You then ask the fund house to make a particular withdrawal on a particular date every month.
- On each withdrawal date, the fund only makes the redemption of units worth the amount required.
- The remaining units remain invested and continue to grow.
- This process continues until the whole corpus is exhausted or you decide to discontinue the SWP.
Why Mutual Fund SIP/SWP is preferred over Traditional Income Options
Fixed deposits, senior citizen savings scheme, and annuities have always been the primary options for retirement income generation in India. But SWP has become very popular in recent years due to the following factors:
- More favorable taxation: Only the gain part is taxable from every withdrawal, and not the entire withdrawal like the full interest from FD is taxable at your slab rate.
- Growth opportunities: Your leftover corpus is kept invested in the market and grows over time, overcoming the problem of inflation.
- More flexible: You can change, suspend, or terminate the withdrawals any time you want; you cannot do that in annuities.
- Customization of withdrawal: You can withdraw the amount as per your needs, and you cannot withdraw that amount if it is determined by the fund.
- Liquidity: You can access the leftover corpus any time for emergencies; this option is not available in most of the annuities.
How to set up SWP with a ₹3 Crore Corpus
Before making any calculation, there are three aspects that influence the sustainability of your SWP:
- Withdrawal Rate – percentage of your corpus that you withdraw on a yearly basis
- Expected Rate of Return – average annual return on your invested corpus
- Number of Years – the number of years for which income has to be generated (typically around 25-30 years for retirement)
One such benchmark, derived from studies done globally regarding retirement, is the 4-6% withdrawal rate from the corpus on an annual basis.
Example 1: Conservative SWP at 6% Annual Withdrawal Rate
Assume Mrs. Raj, with 3 Crore mutual fund portfolio who invested in a balanced advantage fund that earns 9% return per annum, is planning to do SWP.
Step 1: Decide the Withdrawal Rate
- Withdrawal rate – 6% annually
- Annual withdrawal – ₹3,00,00,000 × 6% = ₹18,00,000
- Monthly withdrawal amount – ₹18,00,000 ÷ 12 = ₹1,50,000
Note LTCG is applicable on SWP withdrawal -12.5% for equiy. LTCG up to 1.25 Lakh is tax-exempt. So, you must consider amount of tax you will be paying while withdrawing money from the corpus.
Step 2: Project Corpus Sustainability
With a 9% expected annual return and a 6% withdrawal rate, the net growth rate is roughly 3% annually (ignoring the effects of withdrawal timing and volatility). Using this simplified model:
| Year | Opening Corpus (₹) | Annual Withdrawal (₹) | Growth @ 9% (₹) | Closing Corpus (₹) |
| 1 | 3,00,00,000 | 18,00,000 | 25,38,000 | 3,07,38,000 |
| 5 | 3,17,00,000* | 18,00,000 | 26,91,000 | 3,25,91,000* |
| 10 | 3,40,00,000* | 18,00,000 | 28,98,000 | 3,50,98,000* |
| 20 | 3,85,00,000* | 18,00,000 | 33,03,000 | 4,00,03,000* |
*Approximate values based on compounding after withdrawals
Withdrawing ₹1.5 lakh every month at a 6% rate from a portfolio that earns 9% every year would not only make sure that the portfolio sustains but also keeps growing as the rate of interest is higher than the rate of withdrawal.
Example 2: Month-by-Month SWP Depletion Model
For a more granular understanding, let’s calculate exactly how long a corpus lasts using the standard SWP depletion formula, which accounts for monthly compounding:
Formula:
Remaining Corpus after n months = P(1+r)^n − W × [((1+r)^n − 1) / r]
Where:
- P = Initial corpus
- r = monthly rate of return
- W = monthly withdrawal amount
- n = number of months
Scenario A: Moderate Growth Fund (10% p.a. return), ₹1.5 lakh monthly withdrawal
- P = ₹3,00,00,000
- r = 10%/12 = 0.833% monthly
- W = ₹1,50,000
This is done on a monthly basis, and it comes out that the corpus does not get exhausted even after a 30-year period, as it keeps increasing, considering that the amount withdrawn monthly is just around 6%, while the return is 10%.
Scenario B: Higher Withdrawal of ₹2.5 lakh/month (10% annual withdrawal rate)
- P = ₹3,00,00,000
- r = 10%/12 = 0.833% monthly
- W = ₹2,50,000
- Annual withdrawal: ₹30,00,000 (10% of corpus)
Due to the higher withdrawal rate, considering withdrawals to be more or less equal to the growth rate, the corpus will stay fairly constant during the early years; but if the returns fall short of the expectations of 10%, it becomes very easy to exhaust the corpus—the point being made here is that a 10% withdrawal rate is a risky move.
Comparing Withdrawal Rates
| Monthly Withdrawal | Annual Withdrawal | % of ₹3 Cr Corpus | Assumed Return | Sustainability (approx.) |
| ₹1,25,000 | ₹15,00,000 | 5% | 9% | Corpus grows Higher |
| ₹1,50,000 | ₹18,00,000 | 6% | 9% | Corpus grows steadily |
| ₹2,00,000 | ₹24,00,000 | 8% | 9% | Sustainable 28-32 years |
| ₹2,50,000 | ₹30,00,000 | 10% | 9-10% | High risk of early depletion |
The foregoing comparison shows that the difference between your withdrawal rate and your expected rate of return is the most critical variable that determines the sustainability of your income from an SWP.
Mutual Fund Category for SWP
The kind of mutual fund into which you choose to invest your corpus would play a pivotal role in determining the potential return and risk of your SWP.
- Balanced Advantage Funds / Dynamic Asset Allocation Funds – These would automatically vary their exposure to equity and debt depending upon valuations in the market, providing steady returns with moderate growth and hence making them ideal to form the base of your retirement SWP.
- Conservative Hybrid Funds – These have around 75-90% debt and 10-25% equity exposure providing moderate volatility with decent growth making them perfect for those retired individuals who are looking for stability rather than high growth.
- Aggressive Hybrid Funds – These funds offer 65-80% exposure to equity and are perfect for those individuals who have retired recently and are having higher risk appetite.
- Debt Funds – These are less volatile in nature but provide lowest growth and hence are ideal for meeting immediate cash requirements rather than investing the whole corpus in them.
Most financial advisors advise splitting the ₹3 Crore corpus among 2-3 mutual fund schemes rather than investing the entire amount in one single scheme.
Taxes on SWP Withdrawals
Knowing about taxation is essential in understanding why SWP is usually more efficient than any interest-based financial instrument:
- Equity-Oriented Funds – Long-Term Capital Gain (period over 1 year) greater than ₹1.25 lakh in a financial year is taxed at 12.5%, whereas Short-Term Gain (period less than 1 year) is taxed at 20%.
- Debt-Orientated Funds – Gain is taxed as part of income at the applicable tax slab of the investor as per the current rules for most debt fund investments since April 2023.
- Hybrid/Balanced Advantage Funds = The taxation of such funds depends on their equity weighting – if they have more than 65% equity then they are taxed as equity funds; otherwise, as debt funds.
The main point here is that while a withdrawal from SWP includes both your initial investment (not taxable) and gain (taxable), the overall effective tax rate on the withdrawal amount is much lower than in the case when you withdraw interest from FD (which is taxable as income).
Step-Up SWP Due to Inflation
A constant monthly withdrawal of Rs.1.5 lakhs at present won’t carry the same purchasing power in the next 15 to 20 years. It is therefore prudent to have an increasing SWP scheme wherein the withdrawal amount goes up by a fixed rate (usually 5-6%) annually to cover inflation.
Example of Step-Up Withdrawals (6% annual increase):
| Year | Monthly Withdrawal (₹) | Annual Withdrawal (₹) |
| 1 | 1,50,000 | 18,00,000 |
| 5 | 1,89,300 | 22,71,600 |
| 10 | 2,53,400 | 30,40,800 |
| 15 | 3,39,300 | 40,71,600 |
| 20 | 4,54,300 | 54,51,600 |
A step-up SWP that is required to be sustainable for 20-25 years needs a greater percentage of equity or equity-oriented hybrid schemes in its portfolio since equity alone can give a return of 10-12% over a long period of time.
SWP vs. Annuity vs. Fixed Deposit: A Quick Comparison
| Feature | SWP (Mutual Fund) | Annuity | Fixed Deposit |
| Return Potential | Market-linked, potentially 8-12% | Fixed, typically 6-7% | Fixed, typically 6-7.5% |
| Tax Efficiency | High (gains-only taxation) | Low (fully taxable) | Low (fully taxable) |
| Liquidity | High | Very Low | Moderate |
| Inflation Protection | Yes, if equity-oriented | No | No |
| Flexibility to Adjust Income | Yes | No | Limited |
| Capital Preservation Potential | Yes, if withdrawal rate is conservative | Principal usually not returned in immediate annuities | Yes |
Conclusion
An equity mutual fund investment amounting to Rs. 3 crores can very easily create a consistent income stream for you every month in the range of 1.5 to 2 lakhs per month through systematic withdrawal plan, without eating into the capital value, and even possibly creating growth in the capital invested in the process, all throughout the span of 25-30 years during the retirement period. The success of systematic withdrawal plan depends on the right choice of withdrawal ratio being kept below the long-term return expected from your fund portfolio.
The systematic withdrawal plan is one such retirement plan where you get an income stream as well as growth in the capital and at the same time enjoy the benefit of tax efficiency as well.
