How Can you Make Passive Income? SWP Could be your Answer.
- Kiran S N
- May 30
- 4 min read
Ever wished your investments could give you a regular allowance without cashing out the whole lot? Well, that's pretty much what a Systematic Withdrawal Plan (SWP) does! SWP (Systematic Withdrawal Plan) lets you withdraw a fixed amount regularly (monthly, quarterly, or weekly) from your mutual fund investment without immediately touching the entire principal amount. Think of it as setting up a consistent payday from your own investments.
How Does This Work?
It's simpler than you might think! After investing in a mutual fund for at least one year, you can set up an SWP to receive steady payouts from your investment, while the remaining amount continues to grow. You get your desired cash flow, and the rest of your money keeps working for you, hopefully growing over time.
Interestingly, SWPs aren't brand new. SWP has been around since 2004, but many investors are still unaware of it. So, it's a seasoned tool that's perhaps been a bit of a hidden gem for some.
The Flip Side: What You Give Up – Opportunity Cost & The Power of Compounding
Now, while SWPs are super handy for regular income, there's a trade-off. The biggest downside is that by withdrawing money regularly, you reduce the power of compounding. This means your capital grows less compared to if you left the money invested without withdrawals.
Let's break this down with an example:
Suppose you invest ₹50 lakhs in a mutual fund that's growing at an average of 15% annually (Let's be a little optimistic).
Scenario 1: You use an SWP to withdraw ₹5 lakhs every year. Here’s a simplified look at how your investment might look over 10 years:
Initial Investment: ₹50,00,000
Year 1:
Growth (15% on ₹50L): ₹7,50,000
Value before withdrawal: ₹57,50,000
Withdrawal: ₹5,00,000
End of Year 1 Value: ₹52,50,000 and so on......(detailed graph provided below)
After 10 years of doing this, your remaining capital will be about ₹1 crore (approximately ₹1,00,75,930, to be more precise, based on these calculations). You've received ₹50 lakhs in income over the decade (₹5 lakhs x 10 years), and you still have a handsome sum left.
Scenario 2: You don’t withdraw anything and let it all grow. If you hadn't touched that initial ₹50 lakhs and let it compound at 15% annually for 10 years, your investment could grow to approximately ₹2.02 crores (₹50,00,000 * (1.15)^10).
That's a difference of over ₹1 crore in potential wealth! The ₹5 lakhs withdrawn each year in the SWP scenario isn't there to grow and compound, which leads to a smaller final corpus compared to letting the entire amount stay invested. This "missed growth" is your opportunity cost.
Is SWP a "Good" or "Bad" Thing Then?
Seeing that difference – ₹1 crore with an SWP versus ₹2.02 crores without – you might ask if an SWP is a smart move. The truth is, it's not a simple yes or no. It really depends on your unique financial goals and what stage of life you're in.
If you need a steady income right now – perhaps for retirement or to supplement your current earnings – then an SWP can be incredibly valuable, making it a "good" choice. That regular cash flow is prioritized over maximizing the final sum. However, if your primary goal is to grow your wealth as much as possible for a future milestone like buying a home, or if you're younger and focused on building a large nest egg, then letting your investments compound fully without withdrawals will likely lead to a significantly larger outcome.
Essentially, an SWP offers the comfort and practicality of regular payouts, which can bring great peace of mind. The trade-off is that your overall investment might not reach the highest possible value it could have. So, think of SWP as a specific financial tool: its 'goodness' isn't inherent but depends on whether it's the right tool for your specific financial job.
Taxation
Taxes are part of the deal. SWP withdrawals are subject to capital gains tax. After holding for more than a year, long-term capital gains tax of 12.5% applies this is only if you cross the threshold of Rs 1.25 Lakhs , or if it's held for less than a year short-term rate of a flat 20% is applied. It’s really important to calculate taxes in advance to optimize your SWP strategy so you know exactly what you'll be getting in hand.
Need to Start or Stop? Plan Ahead!
SWPs aren't instant on/off switches. It usually takes about 20 days to start or stop the plan. Also, keep in mind that during market downturns, you might need to pause or adjust your SWP, which requires some processing time. So, a bit of planning is key if you need to make changes.
Ultimately, choosing an SWP, or any investment strategy, comes down to your personal situation. It’s important to understand both the benefits and drawbacks of SWP before choosing it, rather than just following the trend blindly.
Consider your income needs, your investment goals, your risk comfort, and your tax situation. An SWP can be fantastic for creating a regular income stream, especially in retirement, but it might not be the best fit if your primary goal is maximum wealth accumulation over the long term. It's all about what works for you and your financial journey.
✨ Unlock Your SWP Potential! ✨
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