Can SWP in Mutual Funds Protect Your Wealth in 2025’s Volatile Market?

During such times, it is important to identify a strategy that provides steady cash flow without subjecting the investors to undue risks. One method that's increasingly being looked up to is the Systematic Withdrawal Plan (SWP) in mutual funds. But is this strategy as robust in a volatile market, or may it put investors at greater risk?

Prior to determining if SWP could be a shrewd decision amidst market volatility, it's important to know how the strategy is done, what benefits it provides, and the possible risks. Let's discuss if SWP might be a safe income solution in the current volatile financial environment.

[Read: Top Performing SWP Mutual Funds for 2025]

What is a Systematic Withdrawal Plan (SWP)?

A Systematic Withdrawal Plan (SWP) is a mutual fund facility that enables investors to withdraw specified sums at regular intervals - monthly, quarterly, or every year. As much as the withdrawn sum provides periodic income, the accumulated corpus still remains invested and benefits from possible returns.

This disciplined withdrawal process allows investors to preserve cash flow without fully liquidating their investments.

SWP is intended to provide flexibility and stability. Investors have the option of determining how much they wish to withdraw and how often these payments are made. The plan is most sought after by retirees, who need a consistent income stream, or investors looking for structured cash flow for future expenses.

Now, let's have a look at the SWP mutual funds return calculation process.

So, what SWP essentially enables you to do is withdraw in a piecemeal manner. As you can understand, in every monthly withdrawal, your investment in the fund gets diluted by the market value (NAV) of units that you withdraw, while the rest of the mutual fund units will earn returns for you.

[Read: SWP in Mutual Funds: A Smart Way to Generate Regular Inflows from Mutual Funds]

This helps you be in greater command of your investment for your cash needs and are not required to rely upon erratic sources of income. SWP is a useful tool for gaining regular income.

Is SWP a Reliable Strategy in Today's Unpredictable Market?

Amidst the prevailing market uncertainty in 2025, investors are indeed doubtful about whether SWP could generate reliable income without rapidly eroding their investment corpus. Although SWP has considerable advantages, its performance is greatly influenced by market forces and investor strategy.

Market volatility tends to result in fluctuating NAVs (Net Asset Values), which can affect the number of units that are redeemed at each withdrawal. For instance, when market conditions worsen and fund values decline, investors may end up redeeming more units than expected, which could speed up capital depletion.

In stable or rising markets, SWP offers a disciplined means of withdrawing funds while allowing the residual corpus to be appreciated.

Hence, the secret is to map SWP to suitable fund types and not overdraw the rate of withdrawal against the potential of the fund to grow in a volatile market. Investors who have a measured strategy may find SWP to be an effective answer even in turbulent markets.

Advantages of SWP in an Uncertain Market

• Stable Cash Flow During Volatility: Perhaps the greatest strength of SWP is its capacity to provide steady income despite market volatility. Because withdrawals are made at regular intervals, investors could have reliable cash flow to pay bills even when markets are volatile. This reliability makes SWP especially attractive to retirees or those who rely on their investments for monthly bills.

• Rupee-Cost Averaging Effect: Although more commonly linked with SIPs, SWP can also take advantage of the rupee-cost averaging principle. By withdrawing predetermined amounts at regular intervals, investors minimize the risk of market timing. Even when NAVs vary, regular withdrawals averaged over various price levels help reduce the effect of market volatility.

• Tax Efficiency: SWP is generally viewed as more tax-efficient than depending on dividends. SWP withdrawals are considered capital gains. For equity mutual funds held for more than a year, long-term capital gains over Rs 1.25 lakh alone are taxed at 10% for transfers before July 23, 2024, and at 12.5% for transfers on or after this date. For debt mutual funds, SWP withdrawals from three-year-old investments (taken after April 01, 2023) are taxed as per the slab rates. This minimizes tax payments, especially for individuals in higher-income groups.

Risks of Using SWP in a Volatile Market

• Potential Capital Erosion: One of the major risks in turbulent markets is that SWP withdrawals may exceed the growth rate of the fund. Unless the market accelerates after a prolonged period of weakness, withdrawing at fixed intervals without matching returns can deplete the corpus of the investment earlier than anticipated. This risk becomes higher if investors rely on high-withdrawal rates.

• Impact of Prolonged Downturns: Where the market is in an extended period of being bearish, fund values can significantly drop. Withdrawal of funds during these downturns could lead to the sale of more units to fulfil the payouts, hence intensifying capital erosion.

• Reinvestment Risks: Although SWP gives cash flow, investors can be confronted with reinvestment risks if the amount withdrawn is invested in low-yielding instruments during volatile market times. This might cap the overall return on their portfolio.

  [Read:   Follow These Steps to Set Up an SWP in Mutual Funds]

Which Mutual Funds Are Suitable for SWP in 2025?

Choosing the right category of mutual funds plays a crucial role in the success of a SWP strategy, particularly in uncertain markets. Some suitable options include:

1. Large-Cap Equity Funds: Although equity markets are more volatile, large-cap funds are comparatively stable in relation to mid or small-cap funds. SWP from large-cap funds could be a reasonable trade-off between cash flow and capital appreciation.

2. Dynamic Asset Allocation Funds: These funds dynamically change their equity-debt ratio depending on market conditions and are thus the best option to ride out uncertain phases. Dynamic funds can soften portfolios during times of extreme volatility.

3. Hybrid/Balanced Funds: These funds provide a combination of equity and debt exposure, balancing growth and stability. Hybrid funds can enable investors to gain from moderate growth in equities while reducing risks of volatility.

4. Debt Mutual Funds: With their stability and low-risk exposure, debt funds suit conservative investors in search of consistent income with lesser volatility. Debt funds that concentrate on government papers, corporate papers, or liquid instruments can ensure safer returns amidst uncertain times.

[Read: How Retirees Can Wisely Use the SWP Option Following the 4% Withdrawal Thumb Rule]

For retirees living off their investments, SWP can ensure a regular cash flow and still retain part of the investment for its future growth. Using conservative debt schemes or hybrid funds will increase the stability even further.

For individuals who are about to reach meaningful financial targets like financing the education of their children or buying a home, SWP can help to release the amount step by step instead of having to take major lump sum payouts.

Those looking to minimize exposure to unpredictable equity markets may find SWP in debt or hybrid funds a safe option to generate steady returns.

Before implementing SWP, investors should evaluate several factors:

- Ensure your withdrawal amount aligns with the fund's expected returns to prevent depleting the corpus too quickly.

- In highly volatile periods, conservative fund choices may offer better stability.

- Take into account your investment horizon, liquidity needs, and income requirements when determining your SWP strategy.

- Investment in consistently performing funds with relatively low volatility will enhance the stability of payouts.

To Conclude...

In the face of market uncertainty, SWP can be a beneficial strategy for generating consistent income, provided investors choose suitable funds and maintain a realistic withdrawal plan. By striking a balance between stable cash flow and capital preservation, SWP can offer peace of mind during turbulent financial periods.

As market conditions in 2025 remain uncertain, SWP may help investors manage volatility while ensuring financial stability. Careful planning, fund selection, and periodic review of the withdrawal rate are key to maximizing SWP benefits in unpredictable markets.

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MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.
She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.
 

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.