Passive income, often referred to as “money working for you,” is a financial goal that many aspire to achieve. It involves generating income streams that require minimal effort and time, allowing individuals to enjoy financial freedom and pursue their dreams. One of the most effective ways to generate passive income is through investments. In this article, we’ll explore one of the investment options and strategies that can help you create a steady stream of passive income.

Passive income is the earnings you receive regularly with little or no active involvement. Unlike active income, which requires constant time and effort (such as a traditional 9-to-5 job), passive income sources allow you to make money even while you sleep. Investments are a key vehicle for generating passive income, and they come in various forms like stock dividends, rental from real estate, annuities, bonds, etc.

In this article, we are going to see how a Systematic Withdrawal Plan (SWP) in a mutual fund can be a good source of passive income.

What is SWP?

In a mutual fund Systematic Withdrawal Plan (SWP), you can draw a fixed amount from your mutual fund investment(s) every month or at any other frequency (specified by the investor); you can specify the amount to be drawn, and the day of the month when the withdrawal should be made. The amount will be credited directly to your bank account on the specified day. You can continue your SWP as long as there are balance units in your mutual fund scheme account.

How does SWP work?

Once initiated, SWP in a mutual fund scheme generates cash flows for investors by redeeming units at specified intervals. The number of units redeemed hinges on the SWP amount and the scheme’s Net Asset Values (NAV) on withdrawal dates. Let’s illustrate how SWP transforms investments into cash flows through a real-life example.

Imagine you invested Rs 50 lakhs (as a lump sum) in HDFC Balanced Advantage Fund (Growth) on August 1, 2013, for a 10-year period. Starting from September 1, 2013, you withdrew Rs 30,000 (around 7% of the invested corpus) every month as part of a systematic withdrawal plan. By the end of 10 years, you would have withdrawn Rs 36 lakhs, and the valuation of the remaining units in the fund on August 1, 2023, would be Rs 1.62 crores, boasting an impressive annualized return of 17.53%. (Detailed monthly cash flow breakdown can be seen here)

Disclaimer: The HDFC Balanced Advantage scheme(growth) is taken for demonstration purposes only and it’s not a
recommendation of any kind. The data shown here is actual.

Advantages of SWP

The benefits of SWP are manifold, making it a valuable tool for those seeking to bolster their passive income.

  • Regular Passive Income: SWP enables you to generate a steady stream of passive income, complementing your monthly earnings. This feature proves invaluable, especially for retirees needing additional funds for routine expenses or to meet financial obligations, such as EMIs. It ensures a fixed inflow, reducing the need to redeem large chunks of investment at once.
  • Customizable Withdrawals: You have full control over the amount and frequency of withdrawals. You can increase, decrease, or stop the withdrawals as per your financial needs. Additionally, SWPs can be tailored to the investor’s cash flow requirements, whether it’s a small withdrawal to meet regular expenses or a larger amount for one-time needs.
  • Dual Benefits: SWP not only provides a consistent passive income but also nurtures the growth of your invested corpus. As demonstrated in my example, the annualized returns can be remarkably substantial, enhancing your financial well-being.
  • Rupee Cost Averaging. SWP allows investors to benefit from rupee cost averaging while redeeming units. When markets are high, fewer units are redeemed to generate the required cash flow, while more units are redeemed when markets are low. This strategy ensures that the investor is not overly exposed to market fluctuations during withdrawals

Who Should Consider SWP?

  • Conservative Investors: SWP is also suitable for those who prefer regular returns without excessive exposure to market risks, making it an ideal strategy for those seeking capital preservation with liquidity.
  • Retirees: For retirees with or without a pension, SWP provides a stable, predictable income, allowing them to meet living expenses while ensuring their corpus grows or stays intact.
  • Regular Cash Flow Seekers: Individuals who want a regular flow of cash to meet expenses, whether for supplementary income or in addition to their primary salary.
  • Tax-Savvy Investors: Those looking to minimize tax liability on withdrawals can benefit from the tax efficiency of SWPs, particularly when withdrawing from equity funds.

Conclusion

  • A Systematic Withdrawal Plan (SWP) is a versatile, tax-efficient, and effective tool for creating regular passive income. By offering flexibility and a steady income stream, it helps you manage your cash flows without eroding your capital. SWP strikes a balance between income generation and long-term growth, making it a valuable strategy for retirees, regular income seekers, or those looking to complement their primary earnings.
  • Investing in mutual funds through SWP ensures that your money works for you, providing financial stability without compromising on future growth. Whether for long-term planning or short-term liquidity, SWP is an excellent option for those looking to create a reliable income stream while keeping their investments active
  • Remember, SWP can be your key to financial freedom, where your money truly starts working for you.

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