How to Create a Corpus for SWP Through Mutual Fund SIP
Systematic Investment Plans (SIPs) and Systematic Withdrawal Plans (SWPs) are two powerful tools
Step 1: Build a Corpus with SIP
SIP involves investing a fixed amount at regular intervals into a mutual fund. Over time, this disciplined investment approach helps you benefit from rupee cost averaging and the power of compounding. To create a corpus, choose equity or hybrid mutual funds with a proven track record and align them with your risk tolerance and financial goals. The longer the SIP tenure and the higher the returns, the larger the corpus you can build.
At an expected XIRR of 12%, investing ₹10,000 per month for 20 years results in a corpus of approximately ₹99.91 lakh.
Step 2: Transition to SWP for Regular Income
Once your SIP investments have grown into a substantial corpus at the end of the 20th year, you can transition to an SWP to generate regular cash flow starting from the 21st year. With SWP, you can withdraw a fixed amount periodically, which can act as a source of income while allowing the remaining corpus to continue growing. This strategy is particularly useful for retirees or those seeking financial independence.
Assuming an initial corpus of ₹99.91 lakh, you can withdraw 0.5% of the corpus monthly (₹49,955) starting in the 21st year. With an expected annual growth rate of 8% (XIRR) on the remaining corpus, the closing balance after 20 years of SWP withdrawals will be approximately ₹1.96 crore.
Illustration: Combining SIP and SWP
Assumptions:
- Monthly SIP Amount: ₹10,000
- SIP Tenure: 20 years
- Expected SIP Return: 12% (XIRR)
- SWP Withdrawal Rate: 0.5% of the corpus monthly (₹49,955)
- SWP Tenure: 20 years (starting from the 21st year)
- Expected SWP Corpus Growth Rate: 8% annually (XIRR)
Step 1: Build Corpus with SIP
At an XIRR of 12%, a monthly SIP of ₹10,000 for 20 years grows to approximately ₹99.91 lakh.
Step 2: Withdraw via SWP (Year-on-Year Calculation)
Suppose you start withdrawing ₹49,955 per month (0.5% of the corpus) consistently for 20 years starting in the 21st year. Here's how the SWP works year-on-year:
| Year | Opening Corpus (₹) | Total Withdrawals (₹) | Closing Corpus (₹) |
|---|---|---|---|
| 1 | 99,91,000 | 5,99,460 | 1,01,55,017 |
| 2 | 1,01,55,017 | 5,99,460 | 1,03,30,578 |
| 3 | 1,03,30,578 | 5,99,460 | 1,05,17,975 |
| 4 | 1,05,17,975 | 5,99,460 | 1,07,17,574 |
| 5 | 1,07,17,574 | 5,99,460 | 1,09,29,769 |
| ... | ... | ... | ... |
| 20 | 1,87,90,000 | 5,99,460 | 1,96,00,000 |
At the end of the 20th year of SWP withdrawals (40th year overall), the closing corpus will grow to approximately ₹1.96 crore, demonstrating the sustainability of this withdrawal strategy.
SIP Returns at 12% XIRR
At an XIRR of 12%, the SIP investment of ₹10,000 per month for 20 years results in a corpus of approximately ₹99.91 lakh. This demonstrates the wealth-building potential of disciplined SIP investing.
Disclaimer
Investments in mutual funds are subject to market risks. Past performance is not indicative of future results. The above illustration is for educational purposes only and does not constitute financial advice. Please consult a financial advisor to tailor strategies to your specific financial goals and risk tolerance.
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