Retired individuals and financially independent investors depend on the returns from investments to sustain their living expenses. Some of the most popular avenues of passive income for these individuals include interest income from fixed deposits (FDs) and Systematic Withdrawal Plans (SWPs) in mutual funds.
In this article, we will compare these two different avenues of passive monthly income to helpyou understand which one is more appropriate for your needs.
What is a systematic withdrawal plan?
An SWP or a systematic withdrawal plan is a facility offered by mutual funds that allows investors to withdraw a fixed amount or a percentage of their investment at regular intervals (monthly, quarterly, annually, etc.).
For instance, suppose you invest ₹1 crore in a mutual fund that offers an assumed 12% annual return. This means your investment may grow to ₹1.12 crore after a year, assuming no withdrawals.
Now, if you set up an SWP of 6% per year, you would withdraw ₹6 lakh annually, or around ₹50,000 per month. Since your expected return (12%) is higher than your withdrawal rate (6%), your corpus could continue to grow over time, assuming market performance remains stable.
However, if you set your withdrawal rate higher than your return rate, say at 15% per year, your corpus would start depleting over time, as you would be withdrawing more than your investments are earning.
Thus, it is crucial to keep your SWP withdrawal rate lower than your expected returns to ensure the longevity of your investment.
FDs for monthly income
Fixed deposits are an especially attractive avenue for conservativeinvestors due to the high level of security offered. With a fixed deposit, the safety of your funds is almost fully guaranteed. However, the returns offered by fixed deposits are generally lower compared to the returns offered by mutual funds.
For instance, if you have ₹1 crore in your fixed deposit generating 7% returns every year, you will be earning around ₹7 lakh per year. While this may be lower than what you could earn from mutual funds, the returns here are guaranteed.
Moreover, you can set up an automated monthly withdrawal from your FD to your bank account for the interest income.
Comparing SWPs and FDs for monthly income
An SWP may be a better choice as a tool for monthly income if:
- Your investment horizon for monthly income is long-term (5 or more years).
- You prioritise capital appreciation and long-term corpus growth.
- You want your investments hedged against inflation.
- You are comfortable with short-term fluctuations in your investments.
An FD may be a better option for monthly income if:
- You are retired and absolutely need to protect your invested capital.
- You need a predictable and reliable monthly income.
- You have a short to medium time horizon for monthly interest income (1-3 years)
- You prefer guaranteed returns and simplicity over the possibility of higher returns that come combined with the risk of losing your capital.
To conclude
The choice between SWPs and FDs for monthly income is entirely dependent on your personal circumstances. If you are invested for the longterm and seek capital appreciation, SWPs can be an ideal way to grow the corpus and protect against inflation. On the other hand, if you need short-term guaranteed income, then FDs are an ideal choice to protect the capital while receiving fixed-interest income. If you are still confused between the two options, consider seeking guidance from a financial advisor.
