When it comes to managing your mutual fund investments, one common dilemma is whether to keep reinvesting your returns or to generate some income from your investments. 

Each path serves a different purpose. Reinvesting can help your money potentially grow faster over time, while withdrawing can give you cash flow when you need it. For investors transitioning from the accumulation phase to the income or distribution phase, finding the right balance becomes critical.

That’s where an SWP calculator can be a powerful tool. It helps you plan withdrawals wisely, without compromising the long-term sustainability of your investment.

Reinvestment: Letting compounding do the work

Reinvesting your mutual fund returns, especially through a growth option allows your money to potentially grow uninterrupted. Instead of withdrawing your potential gains, you keep them invested, continuing to access potential growth opportunities in the market. As a result, your returns can potentially generate additional returns, and the cycle can go on over years. 

This is what fuels compounding—the idea that your gains earn more gains. Over long periods, this has the potential to significantly boost your overall corpus. A systematic investment plan (SIP) can help you build wealth over time in this manner by investing in regular instalments.

Let’s say you invest Rs. 10 lakh in a mutual fund that gives an average return of 10% annually. In 10 years, without touching the money, your investment could grow to about Rs. 26 lakh* approx. But if you start withdrawing regularly without planning, you may not reach that figure.

*Example is for illustrative purposes only

So, reinvesting can be a more suitable approach if you don’t need regular cash flow immediately and are focused on long-term wealth creation.

Withdrawing: When income becomes the priority

On the flip side, there are many scenarios where withdrawing returns becomes important. For example:

• A retiree is looking for monthly income
• A parent is funding their child’s education
• Someone is transitioning from active income to passive income

A Systematic Withdrawal Plan (SWP) can be one of the convenient ways to withdraw money at regular intervals from a mutual fund – monthly, quarterly, annually etc. Even as a part of your investment amount is released to you, the balance stays invested and continues to potentially grow over time.

This gives you two advantages:

1. You potentially get predictable income at an amount and frequency that suits you.
2. Your unused funds keep getting access to growth potential and compounding opportunities.

However, unlike reinvestment, this approach gradually reduces your corpus. If not planned carefully, you might outlive your investments.

SWP calculator: For clearer planning

So, how do you increase the likelihood of your withdrawals being sustainable over time? An SWP calculator can help. It’s a simple tool that helps you estimate how much you can potentially withdraw regularly from your fund without depleting the corpus too soon.

The tool requires you to enter your total corpus size, expected rate of return, withdrawal amount, frequency, and duration. The calculator does the rest—giving you a clear picture of how your investment will behave under different scenarios.

Let’s look at a simple example*.

Suppose you have a mutual fund corpus of Rs. 50 lakh and want to withdraw Rs. 25,000 per month. You want to start your withdrawals after one year and want them to last you seven years. Assuming an expected return of 10% per annum, the SWP calculator shows you that at this rate, your balance at the end of the tenure will be Rs. 71.4 lakh (approx.), indicating that such a plan may be sustainable.  Now, let’s say you increase your withdrawal to Rs. 1,00,000 per month. The calculator shows you that at this pace, you can only sustain 72 withdrawals, meaning that your funds will not last for the desired seven years. This can help you make informed decisions. 

*Example is for illustrative purposes only. The calculator uses a fixed rate of returns for its estimates. Actual returns depend on market conditions and can vary from expectations.

Comparing reinvestment and SWP outcomes

While SWP gives you the benefit of regular income, it does come at a cost—your final corpus may not be as large as it could’ve been had you reinvested everything.

To compare both outcomes:

• Use an SWP calculator to simulate different withdrawal scenarios
• Use a compounding calculator to see what your corpus could grow to if you didn’t withdraw at all

This side-by-side analysis can bring insights. For instance, you might realise that withdrawing too much too soon may impact your long-term financial goals. On the other hand, withdrawing strategically may allow you to receive some income from your investments while still preserving some growth potential.

In essence, there’s no one-size-fits-all answer to the reinvest vs withdraw debate. It depends on your financial goals, risk appetite, and stage of life.