Which mutual funds are best for SWP? Expert explains, also decodes STP tax implications

A Systematic Withdrawal Plan (SWP) has become a popular option for investors looking to generate a regular income from their mutual fund investments. Whether it's for retirement planning or meeting monthly expenses, an SWP allows investors to withdraw a fixed amount at regular intervals while the remaining corpus stays invested. However, many investors are unsure about which mutual funds are best suited for an SWP and whether there are any tax implications when using a Systematic Transfer Plan (STP).

One such query came from Shiva, a viewer of The Money Show on ETNow, who asked about the best mutual funds for an SWP, whether there are schemes specifically designed for SWPs, and the tax implications of STPs.

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Expert, Shweta Jain, Investography, responded to this query and said that there is no universal answer, as the right strategy depends on an investor's financial goals, investment horizon and risk profile.

According to Jain, recommending the top five mutual funds for an SWP without understanding an investor's financial situation would be inappropriate.

She explained that factors such as the investment horizon, withdrawal amount, portfolio size, financial goals and risk appetite need to be evaluated before suggesting any mutual fund scheme. "I cannot recommend the top five funds without knowing the investor's requirements. A detailed analysis is needed before recommending any scheme," she said.

Jain said investors should choose mutual funds based on when they intend to begin their SWP. If the goal is to build wealth for several years before starting withdrawals, investors can initially invest in equity or hybrid funds to benefit from long-term growth.

"If you plan to invest for around 10 years and start an SWP later, you can begin with equity or hybrid funds during the accumulation phase. An aggressive investor can later shift a portion of the corpus to debt funds before beginning withdrawals," she explained.

For investors planning to start an SWP within the next three to five years, she said hybrid funds with lower equity exposure may be a suitable option.

For investors who require regular income immediately, Jain recommended debt mutual funds over equity-oriented schemes. According to her, even a limited equity allocation can introduce market volatility, making monthly withdrawals unpredictable and increasing anxiety for investors who depend on that income.

"If someone wants to begin an SWP immediately, debt funds are a better choice because you don't want to take unnecessary risks with money meant for regular withdrawals," she said.

She added that short-term market fluctuations can make investors uncomfortable, especially if they rely on their mutual fund investments to meet regular expenses.

Jain also suggested an alternative approach for long-term investors. Instead of relying on a single portfolio for both wealth creation and income generation, investors can maintain separate allocations for different objectives.

One portion of the portfolio can remain invested in equity funds for long-term growth, while another portion can be allocated to debt funds from which regular withdrawals can be made through an SWP.

She noted that the ideal allocation depends on the overall portfolio size, withdrawal requirement and financial goals.

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Tax implications of STPs?

While responding to the query, Jain noted that investors should also understand the tax implications before opting for a Systematic Transfer Plan (STP).

An STP involves redeeming units from one mutual fund and investing the proceeds into another. Since every transfer is treated as a redemption from the source scheme, it may attract capital gains tax depending on the type of fund and the holding period. Investors should therefore factor in the tax impact before planning regular transfers.

According to Jain, investors should avoid searching for a standard list of the "best" mutual funds for an SWP. Instead, they should first determine when they need regular income, how much they intend to withdraw and the level of risk they are comfortable taking.

Choosing the right combination of equity, hybrid and debt funds, and understanding the tax implications of STPs, can help investors create an SWP strategy that balances regular income with long-term wealth creation.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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