Turn Mutual Funds Into Monthly Income (Part 2 - Systematic Withdrawal Plans - Reverse SIPs)

How do SWPs work?

SWP lets you keep most of your money invested, while receiving a regular cash flow from a specified date (usually retirement or net negative cash flow periods). They are set up from the growth option of an open-ended mutual fund scheme.

Now let us see how SWP works to create regular income for investors:

1. You invest a lump sum or via SIP in a scheme’s growth option.

2. You instruct your MFD to start an SWP: specify amount, frequency (monthly/quarterly), start date, end date (if any) and duration/number of payouts.

3. Commencing from the start date, on each payout/withdrawal date, the fund redeems units worth the requested amount at that day’s NAV — units redeemed = (withdrawal amount ÷ NAV). The remaining units stay invested.

What are the various withdrawal options in an SWP?

The investor can instruct the MFD to select any of the below types of SWPs (not all mutual funds offer all of these options):

• Fixed-amount SWP: Withdraw a fixed rupee amount at each interval. The number of units redeemed depends on the NAV as of that date.

• Fixed-unit SWP: Redeem a fixed number of units at each interval. The rupee amount would depend on the NAV as on that date.

You have to set a start date for the SWP. You can also put an end date or let it continue until corpus depletes.

Key benefits of SWPs

• Regular and predictable cashflows (useful for retirees or individuals with regular income needs) – compared to the IDCW option where the frequency and quantum of payout is usually dependent on the fund manager, SWP gives control of these factors to the investor.

• Potential tax-efficiency vs dividends —you are redeeming units resulting in tax on capital gains only, whereas dividend payouts may attract TDS and are taxed in the hands of investor at their slab rates. Essentially SWP avoids AMC dividenddistribution mechanics.

• Keeps money invested so you still benefit from any upside on the remaining corpus.

• Flexible frequency and amount.

Things to keep in mind

• If withdrawals exceed portfolio returns, corpus may shrink over time

• SWP income is not guaranteed like an annuity. Withdrawals stop if the corpus is depleted before the planned end date. Investors can use conservative withdrawal rates (financial planners often mention rules like 3–4% annually as a starting heuristic).

• SWPs are subject to market timing risk (that is, withdrawals when NAV is low results in more units being redeemed; during bear markets you may deplete corpus faster). IDCWs give this discretion to the fund manager, who may be better equipped to decide the timing of distribution.

Taxation of SWPs

• Since SWP is a redemption of units, only the profit/capital gains portion of each payout is taxable and not the entire withdrawal amount.

• You can refer to our 3-part blog on ‘You’ve Checked the Returns - But Have You Checked the Taxes?’ for tax implications on capital gains from sale of mutual fund units.

• For investors who bought units at multiple times (SIP/lump-sum), tax rules use an established matching method like FIFO (first-in, first-out) to determine which lot is treated as sold (and profits/gains are calculated accordingly).

While SWPs are a good option for generating regular income from mutual funds, the withdrawal amount, withdrawal period, corpus/value of the portfolio at start date play a very important role in determining whether the SWP will fulfil your goals or will corpus deplete faster than planned. We cover this in the third part of this series - Turn Mutual Funds Into Monthly Income (Part 3 - Key SWP Decisions)