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SWP for a 20 Lakh Investment: Seeking Guidance from a 48-Year-Old Reader

Ramalingam Kalirajan |8319 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Apr 17, 2025

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more

Question by Girish on Apr 16, 2025Hindi

How the SWP works? Is it safe to invest in SWP for 20 lakhs, please help me to understand and what are risk involved.

Ans: Wanting regular income from investments is a practical and necessary goal. A Systematic Withdrawal Plan (SWP) is one powerful option. It helps you withdraw money monthly from your mutual fund investments. But before you commit Rs. 20 lakhs to SWP, let’s study it from every angle.

Let us understand how SWP works, its safety, usefulness, and risks—clearly and completely.

What is SWP in Simple Words?

SWP is a feature in mutual funds.

It allows you to withdraw a fixed amount every month.

The money comes from your own investment in the fund.

The remaining amount stays invested in the fund.

That balance keeps growing with market performance.

It is the opposite of SIP. SIP adds money. SWP gives money back to you.

How Does It Work in Practice?

Suppose you invest Rs. 20 lakhs in a mutual fund.

You set up a SWP of Rs. 25,000 per month.

Every month, Rs. 25,000 is credited to your bank account.

This continues until you stop or your investment runs out.

The remaining capital continues to earn market returns.

If the fund performs well, your capital may grow despite withdrawals.

If the fund performs poorly, your capital may reduce faster.

Where Should You Invest for SWP?

Choose equity-oriented hybrid or balanced mutual funds.

These funds aim for stable and moderate growth.

Avoid high-risk funds like small-cap for SWP needs.

Avoid pure debt funds too. They may not beat inflation.

Select actively managed funds only.

Index funds are not suitable here.

Index funds have no human control. They just copy markets.

In falling markets, they provide no cushion.

Actively managed funds adjust risk and protect capital better.

A Certified Financial Planner can help choose suitable funds.

Is SWP Safe for Rs. 20 Lakhs?

SWP is not a separate product. It is a feature.

The safety depends on where your money is invested.

The fund's performance decides the return and capital safety.

If you choose well-managed funds, SWP becomes more reliable.

If you withdraw too much too soon, it becomes risky.

So, withdrawal amount must match the fund’s return capacity.

A Certified Financial Planner will help you set the right withdrawal rate.

What Are the Benefits of SWP?

You get regular income every month.

This is useful for retired people or families needing cash flow.

It is more tax-efficient than FD interest.

In equity funds, after one year, gains up to Rs. 1.25 lakh are tax-free.

Gains above Rs. 1.25 lakh are taxed at 12.5% only.

In FDs, the full interest is taxed as per your slab.

SWP gives better control over taxation.

You also decide how much and when to withdraw.

It does not lock your capital like annuities.

You can stop or change the amount anytime.

Your remaining capital still grows.

What Are the Risks Involved in SWP?

The biggest risk is market performance.

If the fund performs poorly for long, capital may reduce faster.

Withdrawing more than the return rate leads to capital erosion.

In early years, if there is a market crash, returns can fall.

This is called sequence of return risk.

If you panic and stop the SWP, you may lose long-term gains.

Therefore, fund selection and amount choice must be done carefully.

Do not withdraw too much from equity funds.

Stick to 5% to 7% withdrawal of the corpus per year.

Rebalance the portfolio annually with the help of a Certified Financial Planner.

How is Tax Calculated on SWP Withdrawals?

Tax is only on the gain portion, not the full withdrawal.

For equity funds, if held more than one year:

• Gains up to Rs. 1.25 lakh in a year are tax-free.

• Gains above that are taxed at 12.5%.

For withdrawals within 1 year, 20% tax on short-term gains.

For debt funds, entire gain is taxed as per your income slab.

Tax is deducted only on capital gain, not total SWP amount.

This makes SWP more tax-friendly than FD interest.

How Does SWP Compare With FD Interest?

FD interest is fixed but fully taxable.

SWP offers flexibility, better post-tax returns, and capital appreciation.

FD interest stays flat. SWP can grow if fund performs well.

FD locks your capital. SWP keeps your capital liquid.

FD maturity must be renewed. SWP can continue for years.

FD income stops when capital ends. SWP may continue even longer.

In inflation terms, FD income loses value. SWP may protect against inflation.

Should You Invest Rs. 20 Lakhs in SWP?

Yes, if you want steady monthly income.

Yes, if you don’t need the whole amount immediately.

Yes, if you invest in the right mutual fund category.

No, if you expect guaranteed income like FD.

No, if you cannot handle short-term fund fluctuations.

No, if you plan to withdraw high amounts monthly.

Tips to Make Your SWP Investment Strong

Choose hybrid equity funds, not pure equity or debt funds.

Use regular plans through a Certified Financial Planner.

Direct plans lack personalised advice and regular review.

MFDs with CFP credentials track markets and help in changes.

Avoid index funds. They don’t protect during market falls.

Active funds give better control and management.

Start small SWP first. Increase later if fund performs well.

Monitor performance every year with your planner.

Avoid withdrawing during deep market crashes.

Let the capital stay longer to recover and grow.

Rebalance every year. Shift gains to safe funds when needed.

Can SWP Be a Retirement Plan?

Yes, many retired investors use SWP.

It is a flexible, tax-efficient income source.

SWP protects principal if managed properly.

It also adjusts to your changing cash needs.

Unlike pension plans, you keep full control.

You can stop or increase SWP anytime.

You can leave the remaining amount for your family.

What Happens to Remaining Amount After SWP?

The remaining money stays in the mutual fund.

It continues to earn returns from the market.

You or your nominee can redeem the balance any time.

It is not locked. It stays liquid.

Capital not used becomes part of your legacy.

You can also use it to increase monthly SWP later.

Or withdraw lump sum for emergencies.

Finally

SWP is a very smart tool. It gives you peace, flexibility and tax benefits. But it needs careful planning. It is not risk-free. But with right fund, right amount and right advice, the risks reduce.

Use actively managed mutual funds. Avoid index funds. Avoid direct plans. Work with a Certified Financial Planner. They will guide, monitor and adjust when needed.

SWP is not just about monthly income. It is about freedom, control and dignity in retirement. Rs. 20 lakhs can give strong support for your goals.

Choose wisely. Plan clearly. Review regularly.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

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