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In mutual fund investing, both Systematic Investment Plans and Systematic Withdrawal Plans play a vital role in helping investors manage and plan their cash flow effectively. While an SIP is designed to help investors build wealth by regularly investing in mutual funds over time, an SWP focuses on generating a steady cashflow by systematically withdrawing from existing investments.
In this special series, titled ‘Seekho Paiso ki Bhasha’ (Learn the Language of Money), Kotak Mutual Fund MD Nilesh Shah simplifies complex market concepts in a candid and accessible way.
Watch the full episode-
“While an SIP lets an investor put money into a mutual fund for creating wealth, an SWP enables them to earn regular cash flow using mutual fund investment,” says the market veteran.
For instance, a salaried employee channels savings from monthly pay into a chosen mutual fund scheme and, upon retirement, needs cash inflow stream to meet regular expenses. A Systematic Withdrawal Plan helps do just that: it allows the investor to generate regular cash flow based on returns from prior investments.
“Whatever wealth the salaried person accumulates while in service can later be utilised as regular cash payouts once the salary inflow stops--that is, after retirement,” explains Shah.
An excellent substitute for monthly salary post-retirement
“For many of our parents, we were their retirement solution… But going forward, people now want to create their own money to maintain their lifestyle after retiring, without needing support from their children,” says Shah.
“By investing smartly during one’s working life, one can secure regular cash flow using this effective instrument (SWP),” he adds.
Which type of funds are suited for SWP?
A heavy allocation to equities can carry the risk of return volatility. A hybrid fund may be suited for this purpose, says Shah
“More conservative investors can go for hybrid funds like equity savings schemes… Average investors can opt for balanced advantage funds, and aggressive investors can consider hybrid funds with a higher equity tilt,” he says.
Given the nature of hybrid funds--which allocate money to a mix of debt and equity--they are well-suited for setting up SWPs, he explains.
Hybrid fund SWP vs FD payouts
Many investors use fixed deposits or other traditional fixed-income options to earn regular interest income.
“In my opinion, an SWP in a hybrid fund may increase the chances of the investor earning real returns while beating inflation. Think of inflation as a termite that weakens the retirement corpus over time. A hybrid fund SWP offers protection against such wealth erosion,” says Shah.
Key aspects to keep in mind while setting up an SWP
The veteran highlights two important points:
- You must first create a sufficient corpus using an SIP: A strong investment base is needed to deliver the desired income. Without proper accumulation, an SWP cannot work effectively.
- It’s wise to set up the SWP at 1-1.5 per cent below the expected return: For example, if you're expecting an 8% annual return, it’s practical to withdraw only 6.5–7% to ensure smoother, more sustainable payouts.
The ‘Seekho Paiso ki Bhasha’ series aims to break down investment concepts into simple, relatable terms.
An investor education and awareness initiative by Kotak Mahindra Mutual Fund.
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