How to Generate Regular Income From Mutual Funds

Mutual funds can help build wealth and offer regular income through a Systematic Withdrawal Plan (SWP) or Income Distribution cum Capital Withdrawal (IDCW). Let’s understand both these approaches and how investors can use them to generate regular income from mutual fund investments.

Can Mutual Funds Generate Regular Income?

Mutual funds can potentially generate regular income if you opt for SWPs and IDCW. An SIP (Systematic Investment plan) helps in the accumulation phase, i.e build your investment corpus while SWPs can provide fixed, regular withdrawals from that corpus.

In a SWP, you set a fixed amount that is automatically withdrawn from your mutual fund corpus and transferred to the linked bank account at regular intervals. You can choose the withdrawal frequency based on your preference.

In the IDCW option, formerly known as the dividend option, the fund distributes a portion of its profit or realised gains to the investors. The amount distributed under this option fluctuates depending on the market performance and the rules set by the AMC (Asset Management Company).

Ways to Generate Income From Mutual Funds

Here are different ways you can generate income from mutual funds.

Systematic Withdrawal Plan (SWP)

If you make a lump-sum investment in a mutual fund or have a substantial amount of mutual fund corpus, you can opt for SWP to withdraw a fixed sum of money at regular intervals as per your preference. This approach is suitable for investors seeking consistent payouts. Investors have to pay capital gains tax on the capital gain component of each redemption, not the entire withdrawal amount.

Income Distribution cum Capital Withdrawal (IDCW)

In the IDCW option, the fund periodically distributes a portion of its profit or returns to investors and decides the amount to be distributed. IDCW payouts are not guaranteed and may not be regular. This option is suitable for investors who prefer payouts determined by the fund’s performance.

Until 2020, all companies were required by law to pay a dividend distribution tax (DDT) of 15%. As of April 2020, dividends received from mutual fund schemes are now taxed at the investor's applicable income tax rates.

If the total dividend you receive in a financial year exceeds ₹10,000, a TDS rate of 10% will be applicable.

Conservative Hybrid and Debt Funds for Income

A conservative hybrid mutual fund invests around 75% to 90% of the fund in fixed-income debt instruments and the rest into the equity market, offering steady income with slow growth.

Debt funds such as short-duration, corporate bond, or banking and PSU debt funds carry lower short-term volatility with regard to income generation.

Investors can invest in conservative hybrid funds and debt funds to generate a stable income from their mutual fund investments.

FAQs

Can I get a fixed monthly income from mutual funds?

Yes, you can set up an SWP to automatically withdraw a fixed amount of money from your investment corpus and transfer it to your bank account periodically.

What is an SWP in mutual funds?

The SWP option lets you automatically withdraw a fixed amount of money from your mutual fund investment at regular intervals.

Do all mutual funds offer dividends?

No, not all mutual funds offer dividends. However, some mutual funds may distribute a portion of their gains to the investors if they opt for IDCW.

Which type of mutual fund generates income?

Mutual funds such as hybrid funds and debt funds can potentially generate income as they invest in fixed-income debt securities.

Is regular income from mutual funds taxed?

Yes, but withdrawing through an SWP is generally more tax-efficient because you only pay tax on the capital gains, not the full withdrawal amount.