{"id":13435,"date":"2018-04-03T14:58:55","date_gmt":"2018-04-03T09:28:55","guid":{"rendered":"https:\/\/blog.fundsindia.com\/blog\/?p=13435"},"modified":"2019-11-08T10:23:50","modified_gmt":"2019-11-08T04:53:50","slug":"why-swps-are-great-for-regular-income-part-i","status":"publish","type":"post","link":"https:\/\/www.fundsindia.com\/blog\/mf-research\/why-swps-are-great-for-regular-income-part-i\/13435","title":{"rendered":"Why SWPs are great for regular income – Part I"},"content":{"rendered":"

When you are in your salaried years, your salary will more than take care of your regular income. But there comes a time when you start depending on your investments for such needs, whether on retirement or due to any other reason. \u00a0<\/span><\/p>\n

To generate a regular income, the most popular options are fixed deposits or dividend plans of mutual funds<\/a>. FDs\u2019 safety of principal and assured cash flows makes it an attractive option. But when it comes to some extra income, dividend plans from debt funds<\/a> and MIPs get attention. What if we tell you there’s a even better way to go about this with a systematic withdrawal plan or SWP?<\/span><\/p>\n

In a two-part series, we discuss how you can make use of SWPs to generate optimal returns without compromising on stable cash flows. This week, we\u2019ll show how SWPs stack up against the dividend option. In the next part<\/a>, we\u2019ll compare FD and SWP.<\/span><\/p>\n

SWP is an option where you periodically (usually each month) redeem a specific amount from your mutual fund investment. You can decide the amount and change it anytime you wish to. It\u2019s the inverse of an SIP<\/a>, where you invest each month. \u00a0But proposing SWP as the better alternative to dividend plans usually meets some opposition, encapsulated below.\u00a0<\/span><\/p>\n\"\"<\/a>\n

By using an illustration, we are going to debunk some of the myths for you. <\/span><\/p>\n

Capital and returns<\/strong><\/h4>\n

SWPs for income generation are usually recommended from debt-oriented funds given their stability and lower risk compared to equity funds<\/a>. So consider Rs.5,00,000 in invested in an ultra short-term fund and a long-term debt fund. We also threw in an MIP, given that several investors are attracted by their dividend options. We compared monthly dividend plan and monthly SWP in growth plan, assuming you invested in February 2013. The table below shows what returns you would have made in these two options had you invested 5 years ago in Feb 2013. The average monthly withdrawal is a close approximation to the average dividends paid out during the period.<\/span><\/p>\n\n\n\n\n\t\n\n\t\n\t\n\t\n\t\n\t\n\t\n\t
SWP versus Dividend plans for different categories<\/th>ICICI Pru MIP 25<\/th> <\/th>ABSL Dynamic Bond<\/th> <\/th>UTI Treasury Advantage Fund <\/th> <\/th>\n<\/tr>\n<\/thead>\n
<\/td> Debt Oriented Hybrid Fund <\/b><\/td><\/td>Long Term Debt Fund<\/b><\/td><\/td>Ultra Short Term Debt Fund<\/b><\/td><\/td>\n<\/tr>\n
<\/td>Dividend Plan<\/td>SWP in Growth Plan<\/td>Dividend Plan<\/td>SWP in Growth Plan<\/td>Dividend Plan<\/td>SWP in Growth Plan<\/td>\n<\/tr>\n
Average Monthly Income<\/b><\/td>2,803<\/td>2,800<\/td>2,683<\/td>2,700<\/td>2,346<\/td>2,300<\/td>\n<\/tr>\n
Fund value at the end of 5 years<\/b><\/td>5,64,960<\/td>6,35,864<\/td>4,97,815<\/td>5,55,902<\/td>5,17,860<\/td>5,73,550<\/td>\n<\/tr>\n
Total Monthly Income at the end of 5 years <\/b><\/td>1,65,990<\/td>1,68,000<\/td>1,58,277<\/td>1,62,000<\/td>1,38,416<\/td>1,38,000<\/td>\n<\/tr>\n
Tax outgo<\/b><\/td>59,186*<\/td>6,562<\/td>54,219*<\/td>4,953<\/td>49,202*<\/td>3,557<\/td>\n<\/tr>\n
Returns (XIRR in %)<\/b><\/td>9.11%<\/td>10.96%<\/td>6.5%<\/td>8.41%<\/td>6.36%<\/td>8.07%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\nNote:<\/p>\n