Top Performing SWP Mutual Funds in 2024

October 1, 2024 Mutual Fund

In the ever-evolving landscape of mutual fund investments, the Systematic Withdrawal Plan (SWP) has gained considerable attention among investors seeking a reliable stream of income from their investments. Unlike the Systematic Investment Plan (SIP), where investors contribute regularly, the SWP allows for regular withdrawals, making it an ideal choice for retirees or those needing a periodic income while keeping their capital invested.

A Systematic Withdrawal Plan (SWP) is a smart approach for mutual fund investors looking for consistent income without liquidating their entire portfolio. Whether you’re a retiree seeking regular inflows or someone looking for passive income, SWP allows you to withdraw a fixed sum from your mutual fund investment at regular intervals.

[Read: 15 Top-Rated Mutual Funds for Equity Investors]

In an SWP, the withdrawal amount is debited from the investor’s total corpus by redeeming a portion of mutual fund units. Depending on the performance of the mutual fund, the capital may continue to grow, remain stable, or decline based on the withdrawals and market conditions. The two primary types of SWP plans include:

Fixed Withdrawal: A specific amount is withdrawn at predetermined intervals.

Appreciation Withdrawal: Withdrawals are made only from the gains, leaving the principal intact. By offering this flexibility, SWPs become a unique option to receive passive income without fully exiting the market.

Customized SWP: Some mutual funds offer the flexibility to tailor the withdrawal amount and frequency as per your needs. This allows for greater control over your withdrawals and better alignment with your income requirements.

Note: In my previous article I have discussed some important things you as an investor need to know about SWP in mutual funds (the advantages of using SWPs, how SWP calculation works, and factors to consider when selecting a mutual fund for SWP). You may consider reading ‘SWP in Mutual Funds: A Smart Way to Generate Regular Inflows from Mutual Funds’

Benefits of SWP in Mutual Funds

SWPs offer several advantages that can make them appealing to different types of investors:

1. Regular Cash Flow: SWP ensures a regular income stream, which is particularly useful for retirees or individuals without a steady source of income. The flexibility of choosing the amount and frequency of withdrawals adds convenience.

2. Tax Efficiency: Compared to fixed deposits or other traditional income streams, SWP is more tax-efficient as the withdrawal from equity or hybrid funds is classified as capital gains, which are taxed favourably compared to interest income.

3. Compounding Benefits: Even while withdrawing a portion of the corpus, the remaining units continue to generate returns, allowing investors to benefit from compounding over the long term.

4. Customization: Investors can adjust the withdrawal amount based on their financial needs, giving them control over how much of their investment they want to access while keeping the rest invested.

5. Market Timing Control: Unlike lump-sum withdrawals, SWP helps avoid the risk of market timing. Investors systematically withdraw funds over time, allowing them to manage market volatility better.

6. Investment Growth: Even after withdrawals, the remaining units continue to benefit from market growth if the fund performs well, giving investors the potential for capital appreciation.

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

Why Investors May Opt for SWP in a Rising Market

In the current environment of rising markets, many investors are tempted to book profits by selling their mutual fund units. However, this approach can lead to a loss of potential long-term capital appreciation. SWP, on the other hand, allows investors to benefit from the market rally while generating regular income.

During rising markets, the value of your mutual fund units increases, which may prompt you to take out profits. However, selling too many units at once can erode your investment capital. SWP ensures that you can periodically withdraw a portion of your profits, allowing the remaining capital to continue benefiting from market gains.

For instance, an investor who started a SWP before the current market uptrend might enjoy a higher withdrawal amount due to the increase in unit value. This way, you can maintain a balance between capital preservation and regular income.

This method prevents you from selling a large chunk of your portfolio in one go, which could expose you to market timing risk. By spreading out your withdrawals, SWP enables you to gradually exit the market at favourable price points, maximizing your returns.

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

While markets may be on an upward trend, they are also prone to short-term volatility. If you were to withdraw a large sum all at once, you may face the risk of exiting during a sudden dip. SWP mitigates this risk by spreading withdrawals over time, ensuring that you are less affected by short-term market fluctuations.

However, if the market experiences a temporary dip, you would still have the remaining units invested to benefit from a future recovery. This is particularly important for investors who rely on regular income and cannot afford to deplete their investments during volatile periods.

So, before you consider opting for a SWP plan, you must ensure investing in worthy mutual fund schemes that have the potential to yield returns that outpace inflation. When it comes to investing in mutual funds, the options can seem endless.

We have listed the top-performing equity-oriented mutual fund schemes under various categories based on their 3-year CAGR returns, which you can check out. However, do note that investors may consider investing in any mutual fund scheme only as per their suitability based on risk profile, investment horizon and goals.

Table: Top-performing equity mutual fund schemes across various categories

*Past returns are not indicative of future performance.
*These top-performing equity-oriented mutual funds are based on their 3-year CAGR returns performance track record.
Data as of September 30, 2024
(Source: ACE MF, data collated by PersonalFN Research) 

Across various fund categories, the performance of mutual funds varies based on the market and investment strategy. For instance, small-cap and mid-cap funds like Quant Small Cap Fund and Motilal Oswal Midcap Fund have delivered impressive returns over shorter periods, making them suitable for investors seeking higher growth in a rising market. However, these funds come with greater risk due to the volatile nature of small- and mid-cap stocks.

Quant Small Cap Fund has delivered outstanding returns over short to long terms, with 1-year absolute return of 57.88% and a 3-year CAGR of 40.54%, it shows how aggressive funds could benefit from market rallies. However, small-cap funds are more volatile, so this strategy may not work for investors seeking stability.

Mid-cap funds, such as the Motilal Oswal Midcap Fund, also offer strong growth potential, with returns like 52.42% over a 1-year period and a 37.32% CAGR over three years. Mid-cap funds often strike a balance between high-growth small-cap funds and more stable large-cap funds, making them an attractive option for investors seeking reasonable growth with moderate risk in their SWP plans.

In contrast, investors looking for more stability might prefer funds like the ICICI Pru Large & Mid Cap Fund, which blends large-cap stocks with mid-cap exposure. Its 5-year CAGR of 22.62% suggests moderate returns without excessive volatility, ideal for conservative SWP strategies. ICICI Pru Large & Mid Cap Fund and Bandhan Core Equity Fund offer a balanced approach, providing moderate returns with comparatively lower risk. These funds are ideal for investors looking for stable income from their SWP without taking on excessive market risk.

Flexi-cap and multi-cap funds, such as Quant Flexi Cap Fund or Nippon India Multi Cap Fund, are also appealing because of their diversified approach across market capitalizations, making them a solid choice for SWP.

Overall, SWP strategies in mutual funds allow for customized income plans, and investors can select funds based on their need for growth, risk levels, and income stability, especially in a rising market where equity funds tend to perform well. However, considering the inherent risk in equity-oriented funds, it’s crucial for investors to align their SWP with their financial goals and risk appetite.

In conclusion, SWP mutual funds can be an effective strategy for anyone looking to generate regular income, whether for retirement or other financial goals, without sacrificing long-term investment growth. The key is to choose wisely, monitor the performance, and adjust the withdrawal strategy as needed to maintain the desired balance between income and investment longevity.

This article first appeared on PersonalFN here