Fixed Deposit vs. Systematic Withdrawal Plan

Fixed deposit is one the most popular investment options for regular income after retirement. But with interest rates going down retirees and people have started exploring other options. Systematic Withdrawal Plan (SWP) is one such option which retirees and people looking for regular income must evaluate.

How systematic withdrawal plan works:

SWP is a facility, which allows you to withdraw a specific amount of money from a mutual fund at regular intervals. This is a good option for those looking for income at fixed intervals.

There are two options for SWP. In the first option, a fixed amount is withdrawn at a fixed interval like monthly, quarterly, yearly etc and in the second option the appreciated amount is withdrawn on a fixed interval.

Assume you retire at the age of 60 & live till 85 years. For the left 25 years of your  life post retirement you wish to safeguard your principal amount with regular cash flow. Which instrument will you choose to safeguard your investment?

Your first choice may be the fixed deposit as your objective would be to protect your capital. However, what you may fail to take into account is the impact of inflation on the principal amount & reinvestment risk (every time FD matures & gets repriced at interest rates prevailing at that time). Like currently, post rate cut (& prospective rate cuts in future) Bank FDs will be generating lower & lower returns to the investors, hence has reinvestment risk attached to it.

Also, if these investments are supposed to pass onto the beneficiary (either wife or kids) , you are leaving behind corpus of a much lower value (inflation adjusted) as is shown below:

Let us take actual example of the scheme & how it has performed vis a vis FD over the same period & for same amount of cash flow generation & tax implications

Fixed Deposit(FD) OR Systematic withdrawal plan(SWP)!

Suppose you Invest 1,00,00,000  in both SWP  from HDFC Growth Opportunities Fund- Growth Plan and Fixed Deposit for 25 years 1st Jan 1996 – 31st Dec 2020 @ of 9%.

Withdrawal @ 9% of 1,00,00,000  is 75000 per month.

So from the above calculation it is clearly evident that SWP can give you better returns even after withdrawal. The principal amount invested through SWP from HDFC Growth Opportunities Fund- Growth Plan is appreciated to Rs. 5,19,95,399 but that’s not the case in FD as the principal amount invested in FD remains the same throughout your investment period.

As assumed, you retire at 60 years of age & live till 85 years. The value of your original Rs.1 crore in FDs will be only RS.23.30 lakhs after 25 years (adjusted for inflation @6% p.a.). Which means that even during lifetime value of investment will be eroded in purchasing power & also you are leaving behind a fraction of the original investment behind for your family.

SWP may be the right choice to meet your post retirement expectations as the track record shows appreciation in capital despite regular income @9% per month, However there may be variation in capital at different levels of market during the period.

Based on historical data,  this plan (SWP) is even suitable for the investor having a capital protection mindset if their investment horizon is longtime.

To know more 

You can also use GIIS Financial tools or Our Android App  for Investment, tracking and Asset allocation planning. 

*Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.

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