Best Mutual Fund for SWP 2024 : complete details with SWP calculator

Understanding Mutual Funds

Mutual funds are investment vehicles that pool money from multiple investors to purchase securities like stocks, bonds, and other assets. These funds are managed by professional fund managers who allocate the fund’s investments and attempt to produce capital gains or income for the fund’s investors. Mutual funds provide diversification, liquidity, and professional management, making them a popular choice for individual investors.

What is SWP in Mutual Funds?

SWP stands for Systematic Withdrawal Plan. It is a facility provided by mutual funds that allows investors to withdraw a fixed amount of money at regular intervals from their mutual fund investments. The primary objective of an SWP is to generate a steady flow of income for the investor, making it an excellent choice for retirees or those seeking regular income from their investments.

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What is SWP in Mutual Funds?

SWP stands for Systematic Withdrawal Plan. It is a facility provided by mutual funds that allows investors to withdraw a fixed amount of money at regular intervals from their mutual fund investments. The primary objective of an SWP is to generate a steady flow of income for the investor, making it an excellent choice for retirees or those seeking regular income from their investments.

Benefits of SWP in Mutual Funds

1. Regular Income

Explanation: One of the most significant benefits of an SWP is that it provides a regular and predictable income stream. This is particularly useful for retirees or individuals who need a steady cash flow to cover their living expenses or other financial obligations. By opting for an SWP, investors can ensure a fixed amount is credited to their account at predetermined intervals, such as monthly, quarterly, or annually.

Example: Imagine a retiree named Mr. Sharma who has invested ₹20 lakhs in a balanced mutual fund. He sets up an SWP to withdraw ₹20,000 every month to cover his living expenses. Despite market fluctuations, Mr. Sharma receives ₹20,000 in his bank account each month, providing him with financial stability and peace of mind.

2. Flexibility

Explanation: SWP offers tremendous flexibility to investors in terms of withdrawal amounts and frequency. Investors can tailor their withdrawal plans based on their financial needs and goals. Whether they require monthly income or prefer quarterly payouts, SWP can be customized to meet their requirements. Additionally, investors have the liberty to modify the withdrawal amount and frequency if their financial situation changes.

Example: Mrs. Kapoor initially sets up an SWP to withdraw ₹15,000 monthly from her mutual fund investment. After a year, she decides to reduce her withdrawals to ₹10,000 due to an increase in her pension income. The flexibility of SWP allows her to adjust the withdrawal amount without any hassle.

3. Tax Efficiency

Explanation: SWP can be more tax-efficient compared to traditional fixed deposits or recurring deposits. When an investor withdraws money through an SWP, the amount includes both capital gains and the principal. In many cases, only the capital gains portion is subject to tax. If the investment is held for a long term (typically more than three years), the capital gains might be taxed at a lower rate, making SWP a tax-friendly option.

Example: Mr. Ramesh invests in an equity mutual fund and sets up an SWP. After holding the investment for four years, he withdraws ₹12,000 monthly. Out of this amount, ₹8,000 is considered capital gains and ₹4,000 as principal. Since the investment is long-term, the capital gains are taxed at a lower rate, resulting in a more favorable tax outcome compared to a fixed deposit.

4. Capital Appreciation

Explanation: While providing regular withdrawals, the remaining investment in an SWP continues to stay invested in the mutual fund. This means that the principal amount has the potential to grow, depending on the market performance. Investors can benefit from capital appreciation even as they receive regular income, enhancing their overall returns over time.

Example: Mr. Singh invests ₹30 lakhs in a hybrid mutual fund and sets up an SWP to withdraw ₹25,000 monthly. Over the next five years, the mutual fund performs well, and despite the regular withdrawals, the value of his remaining investment grows to ₹35 lakhs. This capital appreciation, coupled with the regular income, significantly boosts Mr. Singh’s financial position.

How SWP Works

When an investor opts for an SWP, they need to specify the amount they wish to withdraw and the frequency of withdrawals. The mutual fund will then sell the required number of units to generate the specified amount and credit it to the investor’s account.

Example 1: Retired Investor Seeking Regular Income

Background: Mr. Sharma, a retired individual, has accumulated a significant corpus of ₹50 lakhs in a balanced mutual fund over his working years. He is looking for a way to generate a steady income to cover his monthly expenses during retirement.

Setting Up the SWP: Mr. Sharma decides to set up an SWP to withdraw ₹30,000 per month. He completes the necessary paperwork with his mutual fund provider, specifying the withdrawal amount and frequency.

Calculation of Units to be Sold:

• Initial Investment: ₹50,000,000
• Number of Units: Assuming the NAV (Net Asset Value) of the mutual fund is ₹100 at the time of investment, Mr. Sharma has 500,000 units (₹50,000,000 / ₹100).
• Monthly Withdrawal: ₹30,000
• Units Sold per Withdrawal: If the NAV remains ₹100, the fund will sell 300 units (₹30,000 / ₹100) to generate the required amount.

Process:

1. At the end of each month, the mutual fund sells the necessary number of units (300 units) at the current NAV (assuming it remains ₹100 for simplicity) to generate ₹30,000.
2. The ₹30,000 is credited to Mr. Sharma’s bank account to cover his monthly expenses.

Impact Over Time:

• After 1 Year: Mr. Sharma withdraws a total of ₹360,000 (₹30,000 * 12 months), selling 3,600 units (300 units * 12 months).
• Remaining Units: Mr. Sharma now has 496,400 units (500,000 – 3,600).

If the NAV fluctuates, the number of units sold each month will vary accordingly. For instance, if the NAV rises to ₹110, fewer units (approximately 272 units) will be sold to generate the same ₹30,000.

Capital Appreciation:

• If the NAV increases over time, the value of the remaining units could grow, offsetting some of the withdrawals and potentially increasing the overall portfolio value.

Example 2: Young Professional Supplementing Income

Background: Ms. Patel, a young professional, has invested ₹10 lakhs in an equity mutual fund to supplement her monthly income. She is not entirely dependent on this income but uses it to cover additional expenses and savings.

Setting Up the SWP: Ms. Patel opts to withdraw ₹5,000 monthly through an SWP. She fills out the SWP form, specifying the amount and the monthly frequency.

Calculation of Units to be Sold:

• Initial Investment: ₹1,000,000
• Number of Units: Assuming the NAV is ₹50 at the time of investment, Ms. Patel has 20,000 units (₹1,000,000 / ₹50).
• Monthly Withdrawal: ₹5,000
• Units Sold per Withdrawal: If the NAV is ₹50, the fund will sell 100 units (₹5,000 / ₹50) to generate the required amount.

Process:

1. Every month, the mutual fund sells the required number of units (100 units at ₹50 NAV) to generate ₹5,000.
2. The ₹5,000 is transferred to Ms. Patel’s bank account.

Impact Over Time:

• After 1 Year: Ms. Patel withdraws a total of ₹60,000 (₹5,000 * 12 months), selling 1,200 units (100 units * 12 months).
• Remaining Units: Ms. Patel now has 18,800 units (20,000 – 1,200).

If the NAV increases to ₹55, the number of units sold each month would decrease. In this case, only around 91 units would be sold to generate ₹5,000, preserving more of the initial investment.

Capital Appreciation:

• As an equity mutual fund, the potential for capital appreciation is higher. If the NAV grows significantly, the value of the remaining units will increase, potentially providing more substantial returns in the long run.

Types of SWP (Systematic Withdrawal Plans)

Systematic Withdrawal Plans (SWPs) are designed to provide investors with a regular stream of income from their mutual fund investments. There are different types of SWP plans to cater to various investor needs and financial goals. Understanding these types helps investors choose the one that aligns best with their requirements.

1. Fixed SWP

Explanation: A Fixed SWP allows investors to withdraw a predetermined fixed amount at regular intervals (monthly, quarterly, semi-annually, or annually). This type of SWP provides predictability and helps in financial planning as the withdrawal amount remains constant regardless of market conditions.

Example: Mr. Kumar invests ₹10 lakhs in a mutual fund and opts for a Fixed SWP of ₹10,000 monthly. Regardless of the fund’s NAV fluctuations, Mr. Kumar will receive ₹10,000 every month. This regular, fixed income helps Mr. Kumar plan his monthly expenses with confidence.

Pros:

• Predictable income stream.
• Simplifies budgeting and financial planning.

Cons:

• Principal amount may deplete faster if the fund’s returns are not sufficient to cover the withdrawals.

2. Appreciation SWP

Explanation: An Appreciation SWP allows investors to withdraw only the capital gains or appreciation portion of their investment. This type of SWP ensures that the principal amount remains intact, and only the earnings are withdrawn. The withdrawal amount can vary depending on the fund’s performance.

Example: Ms. Verma invests ₹5 lakhs in an equity mutual fund and chooses an Appreciation SWP. Over time, her investment appreciates to ₹5.5 lakhs. She decides to withdraw the ₹50,000 appreciation. If the fund continues to perform well, she can periodically withdraw the additional appreciation while keeping her initial ₹5 lakhs invested.

Pros:

• Principal remains intact, reducing the risk of depleting the investment.
• Potential for higher withdrawals during periods of strong market performance.

Cons:

• Withdrawal amounts can be inconsistent and unpredictable.
• Less reliable for meeting regular income needs.

3. Customized SWP

Explanation: A Customized SWP offers investors the flexibility to tailor their withdrawal plan according to their specific financial needs and goals. Investors can choose different withdrawal amounts and frequencies based on their changing requirements over time.

Example: Mr. Singh initially sets up an SWP to withdraw ₹15,000 monthly from his mutual fund investment. After two years, his financial needs change, and he decides to adjust his SWP to withdraw ₹20,000 quarterly instead. This customization allows Mr. Singh to align his withdrawals with his financial situation and goals.

Pros:

• High degree of flexibility in managing withdrawals.
• Can be adjusted to suit changing financial needs.

Cons:

• Requires active management and monitoring by the investor.
• Potential for mismanagement if not carefully planned.

Comparing Different Types of SWP

Type of SWP	Predictability	Flexibility	Risk of Depleting Principal	Best Suited For
Fixed SWP	High	Low	Higher if returns are low	Retirees, those needing stable income
Appreciation SWP	Low	Medium	Low	Investors focused on capital preservation
Customized SWP	Medium	High	Varies	Investors with changing financial needs

Choosing the Right SWP

When selecting the right type of SWP, consider the following factors:

• Financial Goals: Determine whether you need a fixed, predictable income or if you can manage with variable withdrawals based on market performance.
• Investment Horizon: Short-term goals may benefit from Fixed SWPs, while long-term goals could be better served by Appreciation or Customized SWPs.
• Risk Tolerance: Understand your risk tolerance. Fixed SWPs may deplete your principal faster, whereas Appreciation SWPs preserve your initial investment but offer variable income.
• Market Conditions: Consider the current and expected future market conditions. In volatile markets, an Appreciation SWP might result in inconsistent withdrawals.

Key Considerations When Choosing an SWP Plan

Investment Horizon

Consider the investment horizon when choosing an SWP plan. Longer investment horizons can benefit from equity funds, while shorter horizons might be better served by debt or balanced funds.

Risk Appetite

Assess your risk appetite before selecting a fund for SWP. Equity funds carry higher risk but offer potential for higher returns, whereas debt funds are safer but provide lower returns.

Withdrawal Amount and Frequency

Determine the withdrawal amount and frequency based on your financial needs and goals. Ensure that the chosen amount does not deplete the principal too quickly.

Fund Performance

Evaluate the historical performance of the fund. Consistent performers with lower volatility are preferable for SWP to ensure regular income.

Expense Ratio

Consider the expense ratio of the mutual fund. Lower expense ratios mean higher returns for the investor, which is beneficial for long-term investments like SWP.

Tax Implications of SWP

Short-term Capital Gains (STCG)

If the units sold for SWP are held for less than 36 months, the gains are considered short-term capital gains and are taxed at the investor’s applicable income tax slab rate.

Long-term Capital Gains (LTCG)

If the units sold are held for more than 36 months, the gains are considered long-term capital gains. LTCG up to ₹1 lakh in a financial year is tax-free, and gains above this limit are taxed at 10% without the benefit of indexation.

How to Set Up an SWP

1. Choose the Right Mutual Fund: Select a mutual fund that aligns with your investment goals and risk appetite.
2. Fill the SWP Form: Obtain the SWP form from the mutual fund house or download it from their website.
3. Specify Details: Fill in the details such as the amount, frequency, and start date of the SWP.
4. Submit the Form: Submit the duly filled form to the mutual fund house. The SWP will commence from the specified date.

Also read:- How to Calculate share Average Price: A Comprehensive Guide

Frequently Asked Questions (FAQs) About best mutual fund for SWP

1. What is the minimum investment required for SWP?

The minimum investment amount varies across different mutual funds. Typically, it ranges from ₹1,000 to ₹5,000.

2. Can I change the withdrawal amount and frequency?

Yes, most mutual funds allow investors to modify the withdrawal amount and frequency as per their convenience.

3. Is SWP suitable for all investors?

SWP is ideal for investors seeking regular income, such as retirees. However, it’s important to choose the right fund based on individual risk tolerance and financial goals.

4. What happens if the market is down?

If the market is down, the NAV of the mutual fund decreases, and more units will be sold to generate the specified withdrawal amount. This might deplete the principal faster.

5. Can I stop the SWP anytime?

Yes, investors have the flexibility to stop the SWP anytime by informing the mutual fund house.

6. Are there any charges for SWP?

There might be exit load charges if the SWP is set up within a certain period from the date of investment. Check the specific mutual fund’s terms and conditions for details.

7. Can I set up multiple SWPs in a single mutual fund?

Yes, investors can set up multiple SWPs from a single mutual fund investment, provided they meet the minimum investment requirements.

8. How is the withdrawal amount determined?

The withdrawal amount is specified by the investor at the time of setting up the SWP. The mutual fund sells the required number of units based on the current NAV to generate the specified amount.

9. Is SWP better than dividend plans?

SWP provides a predictable income, whereas dividend plans depend on the fund’s performance and the decision of the fund manager. SWP is considered more reliable for regular income.

10. Can NRIs invest in SWP?

Yes, NRIs (Non-Resident Indians) can invest in SWP, subject to the specific mutual fund’s rules and regulations.

Conclusion

Systematic Withdrawal Plan (SWP) is a valuable tool for investors seeking regular income from their mutual fund investments. It offers flexibility, tax efficiency, and the potential for capital appreciation, making it an ideal choice for retirees and those needing steady cash flow. By understanding the benefits, working mechanism, types, and best SWP plans, investors can make informed decisions to meet their financial goals. Remember to consider factors like investment horizon, risk appetite, fund performance, and tax implications when choosing an SWP plan. With the right strategy, SWP can provide a stable and predictable source of income, ensuring financial security and peace of mind.

Detailed Analysis of Top SWP Mutual Funds

HDFC Balanced Advantage Fund

• Portfolio Composition: The fund invests in a mix of equity and debt instruments, maintaining a dynamic asset allocation to capitalize on market opportunities.
• Fund Management: Managed by experienced fund managers with a proven track record of navigating market cycles.
• Risk Management: The fund employs robust risk management strategies to mitigate market volatility.
• Historical Performance: Analysis of past performance indicates consistent returns, making it a reliable option for SWP.
• Expense Ratio: Competitive expense ratio ensures higher returns for investors.

ICICI Prudential Equity & Debt Fund

• Portfolio Composition: Balanced allocation between equity and debt, aiming for growth and stability.
• Fund Management: Managed by a team of seasoned professionals with expertise in both equity and debt markets.
• **Risk Management

**: Comprehensive risk management framework to protect against market fluctuations.

• Historical Performance: Consistent track record of delivering steady returns, suitable for long-term SWP.
• Expense Ratio: Reasonable expense ratio, contributing to better net returns.

SBI Magnum Balanced Fund

• Portfolio Composition: Diversified investments in equity and debt, with a focus on capital appreciation and income generation.
• Fund Management: Experienced fund managers with a focus on maintaining a balanced portfolio.
• Risk Management: Effective risk management practices to ensure portfolio stability.
• Historical Performance: Demonstrated ability to provide stable returns, making it a dependable choice for SWP.
• Expense Ratio: Competitive expense ratio, enhancing the overall return on investment.