How to get monthly income from mutual funds

Kavya Balaji   /   December 22, 2020
monthly income from mutual funds

Mutual fund schemes have become one of the most prevalent investment avenues. In the last few years, mutual funds have assisted investors in achieving their financial goals.

Besides this, it has also offered better tax-adjusted returns than other traditional vehicles of investments.

However, did you know you can also use mutual funds to get a monthly income? Monthly income is important for retirees who no longer have a regular source of income.

Individuals can invest in mutual funds during their working years and redeem their investments and gains after retirement.

Options for monthly income

We know that different types of mutual funds have different investment objectives. And the investment objectives of debt and debt-oriented funds are income generation and capital protection. It also aims to give returns that beat inflation.

However, it is to be noted that mutual funds are linked to the market and cannot provide a stable monthly return like other traditional savings options. 

Systematic Withdrawal Plan (SWP) is a facility that offers mutual fund investors the option to withdraw a specific sum of money over a timeframe. While this option is available for both equity and debt funds, setting up an SWP in debt funds is better, as debt funds are less volatile than equity funds.

Do mutual funds pay a dividend?

If you opt for the dividend option, your mutual fund will pay a dividend. Besides SWP, the dividend option

 is also a way to get income from mutual funds. In the case of the dividend option, the fund houses distribute the gains to the investor. However, dividends are not distributed regularly and are under the fund house’s jurisdiction.

Unlike dividends received on direct equity investment, mutual fund houses can also distribute the dividends from the invested capital. After the dividend is announced, the unit price of the dividend plan reduces as per the distributed dividend. Dividends are not tax-free. It is added to the investor’s income and taxed as per its tax slab. The mutual fund house will also deduct a 10% TDS on the dividends amounting to more than Rs. 5,000.

Mutual funds growth vs dividend

You can choose the growth or dividend option when you invest in any fund. The dividend option is now renamed as Pay-out of Income Distribution cum capital withdrawal. In the case of a growth option, the fund manager reinvests the returns generated by the fund. Moreover, the dividend distributed will only be a small portion of the invested capital.

So, if we compare the dividend option and SWP, we will see that SWP is a better option than the dividend option.

This article will look at the best way to get income from mutual funds through SWP.

What is Systematic Withdrawal Plan (SWP)?

By choosing to go with the SWP system, you can effortlessly create a regular income through mutual funds. An SWP is the opposite of the Systematic Investment Plan (SIP). Here, you get to withdraw from your mutual funds in instalments. In simple words, the SWP lets you withdraw a certain amount of money from the mutual fund scheme at regular intervals. 

Let’s understand it better with an example. Suppose you wish to withdraw Rs.20,000 on the 1st of every month. Thus, you can do so through SWP. You can also choose varying intervals through this facility, such as monthly, quarterly, half-yearly, and yearly depending on your preference.

In the same manner, the amount you would wish to withdraw can vary according to your need. For instance, some mutual fund houses offer you the option to take out only the gains while keeping the invested money intact in the mutual fund scheme.

Once you have selected the sum and the withdrawal frequency, the fund manager will sell units from the scheme on the pre-decided date. And then, the transaction to transfer the selected amount to your bank will get initiated.

Let’s take another example here. Using the AdvisorKhoj SWP calculator, let’s understand the working of SWP. Imagine you have invested a lump sum amount of Rs. 72,000 in SBI Magnum Income scheme – Regular Plan.

Let’s say you need Rs. 3,000 per month through SWP.  

AMCSBI Mutual Fund
SchemeSBI Magnum Income Reg Gr
Lumpsum AmountRs. 72,000
Lumpsum Amount Investment Date01-04-2019
Withdrawal AmountRs. 3,000
SWP Date10
SWP Start Date06-04-2020
SWP End Date06-04-2022

Here’s how the monthly SWP will take place:

Now, throughout the entire period of your investment, there will be 24 monthly instalments. Also, you will get to withdraw Rs. 72,000 in these instalments. At 8.28% of the return rate, the fund will have Rs. 6219 on 10th March 2022 after the invested capital of Rs.72,000 is redeemed.

Here, you must remember that if the scheme NAV is appreciating at such a percentage that is higher than the withdrawal rate, the investment value will also get appreciated.

However, despite the fall in NAVs, you will still get the regular income until the end of the SWP period or until there is money in the investment scheme.

So, we have seen that the SWP amount remains fixed and doesn’t vary as per the market movement.

Benefits of SWP

SWP is the best option available for investors to receive a monthly income.


In such a plan, you get the utmost flexibility to select the frequency, amount and date according to your need. Also, you can even stop the SWP at any given moment. If you want, you can withdraw an extra amount above and over the fixed SWP withdrawals or invest additionally.

Capital Appreciation

If the withdrawal rate of SWP is lower than the fund return, your invested amount will appreciate, and you may be able to withdraw more money. 

No Tax Deduction at Source (TDS)

One of the significant benefits of investing in an SWP is that if you are a resident of India, you will not have to pay any TDS on your gains.

Mutual Funds to Invest to Get Monthly Income

Mutual funds with low volatility and are capable of beating inflation are considered the best candidates for monthly income. You can put your money in Conservative Hybrid Funds that invest a minimum of 75% of the amount in debt instruments to create a monthly cash flow. Also, the remaining 25% goes into stocks that add better growth to your portfolio.

Furthermore, you can consider other debt fund categories, like Banking and PSU Debt Funds, corporate bond funds, or short-duration debt funds. These funds have the potential to beat inflation.

If not, you can also go with Equity Savings Funds that put a minimum of 65% of your amount in equity instruments such as derivatives. Derivatives are equity-related securities that take advantage of mispricings in several markets to earn risk-free gains by simultaneously purchasing and selling equities.

How to Select the Fund for Monthly Income?

In the previous paragraph, we have seen that debt and debt-oriented funds are best to set up SWP to get monthly income. Now, we will see some of the factors to consider when choosing the right fund:

Past Performance

When selecting a fund for monthly income, we need to look for funds that are not volatile and don’t take unnecessary risks.

As we are parking lumpsum money in a debt-oriented fund, we need to check the fund’s performance when the market is down. If the fund has consistently performed better than its peers during difficult periods, the fund can be a better option.  

Expense Ratio

The expense ratio is referred to as the fee charged by the fund house for managing the fund. It includes fund management fee, marketing fee and commission to distributors. The expense ratio is subtracted from the returns generated by the fund.

While the percentage may seem low, it will considerably impact the total investment portfolio. So, it is better to look for a fund with a low expense ratio. 

Exit Load

Exit load is the fee charged when exiting a mutual fund scheme. Depending on the fund, you will have to pay an exit load if you withdraw within a shorter period.

This fee is levied to avert quick exit and instant cash outflow from fund houses. Thus, as an investor, make sure you are going with mutual funds with zero or minimal exit loads.

Maturity Profile

The maturity period of the underlying debt instruments varies from one type of debt fund to another. Every debt funds have a different maturity profile. So, depending on your investment period, you can select the debt fund that matches your horizon.

Tax Implications of SWP

The redemption through an SWP is subject to taxation. If you have debt funds and your holding period is less than 36 months, the capital gains realised will be added to your overall income. Also, it will be taxed as per your income tax slab rate. However, if the holding period goes beyond 36 months, the capital gains will be regarded as long-term and taxed at 20% after the indexation.

Regarding equity funds, if the holding period is less than a year, the capital gains will be taxed at 15%. On the contrary, if the holding period goes beyond a year, it will be long-term capital gains and taxed at 10% without any indexation.

Who should look at getting monthly income or using SWP from mutual funds?

Generally, experts recommend SWP for ultra-conservative investors and retirees who wish to get a fixed sum of money.

Apart from this, freelancers and those with varying income can also withdraw money through SWP to cater to their regular requirements.

Key Takeaways

In the end, here are some key takeaways to keep in mind:

  • Mutual funds could be useful if you look forward to a regular cash flow to meet basic expenditures.
  • You can earn income from mutual funds by going with an SWP or dividend option.   
  • SWP is a much-recommended option to earn a regular income, considering it is tax-efficient and can guarantee a specific amount at the end of every month.
  • With an SWP plan, you can select the amount, date and frequency according to your convenience.

FAQs on Monthly Income from mutual funds

Can I get monthly income from mutual funds?

Yes, it is possible to get monthly income from mutual funds. One of the best ways is to set up a Systematic Withdrawal Plan in a debt-oriented mutual fund scheme.

Which mutual fund is best for monthly income?

While trying to generate regular income from mutual fund investments, you must stay away from something that gets severely impacted by volatility. Thus, it is best to invest in conservative hybrid mutual funds or debt mutual funds that are less volatile than equity funds and beat inflation.

Which mutual fund gives the highest monthly dividend?

Dividends are generally distributed based on the surplus that the scheme has gained. Thus, there is no mutual fund that can guarantee a monthly dividend. However, if you still wish to get dividends, you can go with the Equity Saving Funds, Conservative Hybrid Mutual Funds or the Dividend Plan of Short Duration Debt Mutual Funds.

What are the safest fixed-income funds?

Among the fixed-income funds category, the overnight fund is the safest choice. It invests in securities that mature in one day. Thus, it doesn’t have any interest or credit risk. The risk of incurring a loss with overnight funds is almost zero. Additionally, you can also go with liquid funds as they only invest in money market securities that mature within 91 days.

Need help investing in mutual funds for monthly income? Get in touch with your consultant at  

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