Systematic withdrawal plans guarantee a fixed monthly income from mutual funds

Just as systematic investment plans (SIP) mitigate market risk at the time of investment, SWPs lower market risk at the time of redemption


Can you please suggest some good mutual fund schemes for systematic withdrawal plan (SWP)? What is the process for investing in such schemes? I have Sharekhan’s trading account, where I am able to buy mutual funds but I am not getting the SWP option.

—Soumen Banerjee

SWP is a method of redeeming money from your mutual fund investment in a systematic (periodic) manner, as opposed to getting it all at once. For example, if you have invested Rs1 lakh in a scheme, you can setup an SWP to withdraw Rs10,000 every month (on a given date) for 10 months.

On the last month, you can set it up so that all the money remaining (which may be more or less than Rs10,000) can be withdrawn.

Investors use SWP for two primary purposes.

The first way is to withdraw money as a regular monthly income.

This is often done for generating post-retirement cash flows, and typically this happens from low-risk debt funds. The second use of SWPs is to avoid the pitfalls of market timing at the time of redeeming the mutual fund units.

Just as systematic investment plans (SIP) mitigate market risk at the time of investment, SWPs lower market risk at the time of redemption.

So, instead of withdrawing money all at once, an investor could set up an SWP for the same.

In this case, typically, the SWP is set up on equity funds, as they are most exposed to market risks. And, of course, some investors use a combination of both these approaches: redeeming from an asset allocated portfolio of funds using SWP to reduce market risks and to generate a regular income too.

There are no specific funds that are considered as being ‘good’ for SWP. This method of redeeming, from a fund or set of funds, can be employed depending on the cash flow needs of the investor.

Practically, all mutual fund schemes offer the SWP option—so please contact the support services of your distributor to enquire how to set up one on its platform.

If that is not possible for any reason, you can always contact the fund house directly with the folio number of your schemes and set up the SWP yourself.

I am nearing retirement. I want to receive monthly fixed income from my investments. Can I invest in monthly income plans for this purpose? I have read that they have monthly dividend options. Will this ensure my cash flow is met?

—Atul Singh

There are two misconceptions about generating a fixed monthly income from mutual fund investments, and you have nicely captured both of them in your question.

The first one is that the class of funds named ‘monthly income plan’ will somehow generate a regular income.

That is not true, and the name is a misnomer. These are debt-oriented hybrid funds that are like any other mutual fund scheme in their ability to generate market-linked returns.

The second misconception is that one can count on the dividend-paying ability of a scheme to generate such an income.

Dividends from mutual funds are not guaranteed in terms of how much they will pay out every month.

A person such as yourself, who is entering retirement, cannot count on receiving a fixed amount every month using such an approach.

The only reliable way to generate a monthly fixed amount as income from your mutual fund portfolio is to do so by setting up a systematic withdrawal plan (SWP).

When you do this, you can specify an amount to be redeemed from your investments into your bank account. So, while the value of your investments will grow in a manner linked to the market, and the dividend payouts happen depend on the profits made by the scheme, your monthly withdrawals will happen regularly and you will receive a steady income.

Can I assign a nominee for my mutual fund units? I was incorporating my Will and wanted my son to be a nominee for my mutual fund portfolio. What’s the process for this?

—R.K. Gulati

Yes, you can assign a nominee for your mutual fund units. In the case of an unfortunate occurrence, the nominees will be able to get the units transferred to their name relatively easily, compared to a case where a nominee is not specified in the folio.

The process for setting this up is very simple. There is a standard form that every mutual fund company has, which you would need to fill and submit to get this done.

A folio can have up to three nominees and you can also specify the percentage allocation of units that need to go to each nominee.

Srikanth Meenakshi is co-founder and COO,

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