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Using Debt Funds For Regular Cash Flows
SWP option helps provide regular cash flows

Many investors assume that mutual fund investments cannot provide regular cash flows. Some others assume that dividends from mutual funds especially debt mutual funds are a good source of regular cash flows. However both stand to be corrected. In case of the former, Systematic Withdrawal Plan (SWP) facility offered by mutual funds helps provide regular cash flows at a defined frequency. In case of dividends, the same are not assured and are subject to availability of distributable surplus from the scheme.

Now let us look at how you can use SWP in debt funds for regular cash flows. Suppose a retired investor invests Rs.10 lakh in a debt fund and desires to receive Rs.10,000 every month. This is how the calculation works –


Balance Amount Rs.
Scheme NAV*
Available Units
Regular Cash Flow Rs.
Monthly Units redeemed
Balance Units^
  A= B X C B C = A/B=F D E=D/B F=C-E
Month 0 1,000,000 50.0000 20,000      
Month 1 1,008,333 50.4167 20,000 10,000 198 19,802
Month 2 1,006,653 50.8368 19,802 10,000 197 19,605
Month 3 1,004,958 51.2604 19,605 10,000 195 19,410
Month 4 1,003,250 51.6876 19,410 10,000 193 19,216
Month 5 1,001,527 52.1183 19,216 10,000 192 19,025
Month 6 999,789 52.5527 19,025 10,000 190 18,1834
Month 7 998,038 52.9906 18,834 10,000 189 18,646
Month 8 996,271 53.4322 18,646 10,000 187 18,458
Month 9 994,490 53.8775 18,458 10,000 186 18,273
Month 10 992,694 54.3264 18,273 10,000 184 18,089
Month 11 990, 883 54.7792 18,089 10,000 183 17,906
Month 12 989,057 55.2357 17,906 10,000 181 17,725

For illustration purpose only. This should not be solely relied upon to arrive at any investment strategy.

*NAV is assumed to increase by 10% per annum, however the same is not assured and may even decrease

^Carried over to column C for the subsequent month

The above table indicates that while the same amount is withdrawn every month, the units equivalent of Rs.10,000 are reduced from the previous month’s balance units in a rising NAV scenario. Similarly, if the NAV decreases, the number of units redeemed (equivalent to Rs. 10,000) will be higher vis-à-vis the previous month’s balance units. 

SWPs are of two types - fixed amount and NAV appreciation. In case of the latter, only the NAV appreciation (if any) is redeemed at a regular frequency while the principal invested remains intact. This option is largely preferred in case of equity funds. In case of the former, units equivalent to a fixed amount are redeemed irrespective of whether the NAV has appreciated or not. This option is preferred in case of debt funds owing to the lower volatility associated with these funds vis-à-vis equity funds. Within debt funds, short maturity bond funds and accrual funds are more suited for SWP.


There is a popular misconception that only traditional products and not market linked products like mutual funds can provide regular cash flows at a defined frequency. Investors may opt for the SWP or Systematic Withdrawal Plan for regular cash flows especially in case of debt mutual funds as they are relatively less volatile than their equity counterparts. Within debt funds, short maturity debt funds and accrual funds would be relatively better placed for SWP.

Next To Come: Using Debt Funds To Profit From Interest Rates