How SWP in equity Mutual Funds is better than Fixed Deposit for Regular Income?

Fixed deposit with banks are the most popular investment option for regular income after retirement. But with interest rates going down retirees have started exploring other options. Systematic Withdrawal Plan (SWP) in equity fund is one such option which retirees and people looking for regular income must evaluate. As per your SWP instructions to mutual fund, a fixed amount is directly credited to your bank account on a particular date every month. In this post we give you details on how SWP in equity Funds beats fixed deposit in terms of Post tax returns!

equity Funds invests in corporate and government Bonds, money market instruments and other fixed income instruments. There are various types of equity Mutual Fund based on the duration of underlying investment.

  1. Liquid Funds – These equity MF invest in instruments with maturity of 91 days
  2. Ultra-Short Term Funds – invests in instruments with maturity up to 1 Year
  1. Short Term Funds – invests in instruments with maturity up to 4-5 Years
  2. Income Funds – invests in instruments with maturity up to 20 – 40 Years

Tax on Fixed Deposit Vs equity Funds:

The interest received on fixed deposit is fully taxable as per the tax bracket of the investor. For equity funds, the taxation is in terms of capital gains. If the redemption of the fund is done within 3 years on investment, the gains are treated as short term capital gains while more than 3 years investment duration leads to long term capital gains.Short term capital gains are added to income and taxed according to the tax slab applicable while long term capital gains are taxed at 20.6% (including education cess) after taking indexation benefit.

How SWP in equity Fund beats Fixed Deposit?

Coming back to the point on how SWP in equity Fund beats fixed deposit, we start with a situation.
You have Rs 10 Lakh with you and want to generate regular monthly income. You have two options:

  1. Invest in Bank FD with 8% interest where the interest is payable monthly
  2. Invest in a Liquid equity Fund and do monthly SWP (assumed return as 8% – similar to bank FD)

Investment in equity Fund:
Assuming you invest Rs 10 Lakh in equity fund with NAV of Rs 100. You would be able to buy 10,000 units. Now every month when you SWP instruction for Rs 6,667 is executed, some mutual fund units are redeemed.
We do a simulation on which is better investment:

Fixed Deposit