How to Create a Monthly Pension Using SWP
Learn how to create a regular monthly income from your mutual fund investments using Systematic Withdrawal Plan (SWP). Includes tax-efficient strategies and calculator guidance.
No pension from employer? Don't worry. You can create your own monthly pension using Systematic Withdrawal Plan (SWP) from mutual funds.
SWP lets you withdraw a fixed amount monthly from your investments, giving you regular income while your remaining corpus continues growing.
What is SWP?
A Systematic Withdrawal Plan automatically redeems a fixed amount from your mutual fund at regular intervals (usually monthly).
| Feature | Description |
|---|---|
| Frequency | Monthly, quarterly, or as needed |
| Amount | Fixed sum you choose |
| Source | Your mutual fund investment |
| Taxation | Only gains portion taxed |
Calculate your SWP: Use our SWP Calculator to plan your monthly income.
How SWP Creates Pension
The Mechanism
| Component | Action |
|---|---|
| Your corpus | ₹50 lakh in mutual fund |
| Monthly withdrawal | ₹25,000 via SWP |
| What happens | Fund redeems units worth ₹25,000 |
| Remaining corpus | Continues earning returns |
The Math
₹50 L corpus, ₹25,000/month SWP, 10% fund return
| Year | Withdrawal | Corpus (Start) | Growth | Corpus (End) |
|---|---|---|---|---|
| 1 | ₹3 L | ₹50 L | +₹4.85 L | ₹51.85 L |
| 5 | ₹3 L | ₹58.2 L | +₹5.65 L | ₹60.85 L |
| 10 | ₹3 L | ₹72.5 L | +₹7.05 L | ₹76.55 L |
Key insight: If returns > withdrawal rate, corpus grows despite withdrawals.
Step-by-Step: Setting Up Your Pension
Step 1: Calculate Required Corpus
| Monthly Need | Annual Need | Corpus at 4% SWP | Corpus at 5% SWP |
|---|---|---|---|
| ₹25,000 | ₹3 L | ₹75 L | ₹60 L |
| ₹50,000 | ₹6 L | ₹1.5 Cr | ₹1.2 Cr |
| ₹75,000 | ₹9 L | ₹2.25 Cr | ₹1.8 Cr |
| ₹1,00,000 | ₹12 L | ₹3 Cr | ₹2.4 Cr |
Formula: Required Corpus = Annual Withdrawal ÷ SWP Rate
Step 2: Choose the Right Funds
| Fund Type | Risk | Expected Return | Best For |
|---|---|---|---|
| Equity (aggressive) | High | 12%+ | Long duration, growth |
| Balanced/Hybrid | Moderate | 9-11% | Most retirees |
| Debt/Conservative | Low | 6-8% | Capital preservation |
Recommendation for retirees: Start with balanced advantage or conservative hybrid funds.
Step 3: Decide Withdrawal Rate
| Rate | Safety | Corpus Duration | Best For |
|---|---|---|---|
| 3% | Very safe | 30+ years | Early retirement |
| 4% | Safe | 25-30 years | Standard retirement |
| 5% | Moderate | 20-25 years | Later retirement |
| 6%+ | Aggressive | 15-20 years | Short horizon |
Step 4: Set Up SWP
| Platform | Process |
|---|---|
| AMC website | Login → Select fund → SWP → Enter details |
| MF utility (MFU) | Login → Transact → SWP → Configure |
| Broker/Distributor | Request form or online setup |
Details needed:
- Withdrawal amount
- Frequency (monthly recommended)
- Date (usually 1st-10th)
- Bank account for credit
Fund Selection for SWP
Best Fund Types for Retirement SWP
| Fund Category | Why It Works |
|---|---|
| Balanced Advantage | Auto-rebalances, moderate risk |
| Equity Savings | Lower equity, stable |
| Aggressive Hybrid | Good growth + stability |
| Multi-asset | Diversified across asset classes |
Sample Allocation (₹1 Cr Corpus)
| Fund Type | Allocation | Amount | Purpose |
|---|---|---|---|
| Balanced Advantage | 50% | ₹50 L | Core income |
| Short-term Debt | 30% | ₹30 L | Stability buffer |
| Flexi-cap Equity | 20% | ₹20 L | Growth |
SWP from: Balanced Advantage Fund (primary source).
Tax Efficiency of SWP
How SWP is Taxed
Each SWP redemption has two components:
- Principal (cost): Not taxed
- Gains: Taxed based on holding period and fund type
| Fund Type | Short-term (< 1 year) | Long-term (> 1 year) |
|---|---|---|
| Equity/Hybrid (65%+ equity) | 20% | 12.5% above ₹1.25 L/year |
| Debt/Conservative | Slab rate | Slab rate |
Why SWP is More Tax-Efficient Than FD
₹6 L annual income need, 30% tax bracket:
| Source | Gross Needed | Tax | In Hand |
|---|---|---|---|
| FD Interest | ₹8.57 L | ₹2.57 L | ₹6 L |
| SWP (equity fund) | ₹6.3 L | ₹0.3 L* | ₹6 L |
*Only gains portion taxed, and at 12.5% LTCG (after ₹1.25 L annual exemption).
SWP can save significant taxes depending on your gains ratio and tax bracket.
Tax Optimization Strategies
| Strategy | How It Works |
|---|---|
| FIFO redemption | First-in-first-out means older (long-term) units sold first |
| Multi-fund SWP | Spread across funds to stay under ₹1.25 L LTCG exemption |
| Equity fund preference | 12.5% LTCG vs 30% slab rate on debt |
SWP vs Traditional Pension Options
Comparison
| Factor | SWP | Annuity | PPF/FD |
|---|---|---|---|
| Returns | 8-12% | 5-7% | 6-7% |
| Flexibility | High | None | Moderate |
| Tax efficiency | Good | Poor | Moderate |
| Liquidity | Full | Zero | Limited |
| Inflation hedge | Yes (if equity) | No | No |
| Risk | Market risk | Insurance co. risk | Low |
Monthly Income Comparison (₹1 Cr Corpus)
| Source | Monthly Income | Inflation-Adjusted (10 years) |
|---|---|---|
| Bank FD (6.5%) | ₹54,167 | ₹54,167 (fixed, eroding) |
| Annuity (6%) | ₹50,000 | ₹50,000 (fixed, eroding) |
| SWP (4% from balanced fund) | ₹33,333 | ₹50,000+ (may increase if markets perform well) |
| SWP (5% from equity fund) | ₹41,667 | ₹60,000+ (may increase if markets perform well) |
Key insight: SWP starts lower but can increase with inflation.
The Bucket Strategy for SWP
Creating Reliable Income
| Bucket | Investment | Years | Purpose |
|---|---|---|---|
| 1: Immediate | Liquid/Ultra-short fund | 1-2 | Monthly SWP source |
| 2: Near-term | Short-term debt fund | 3-5 | Refills Bucket 1 |
| 3: Growth | Equity/Balanced fund | 5+ | Long-term growth |
How It Works
₹1 Cr corpus, ₹40,000/month need:
| Bucket | Amount | Holds |
|---|---|---|
| Bucket 1 | ₹10 L | 2 years expenses |
| Bucket 2 | ₹25 L | 5 years expenses |
| Bucket 3 | ₹65 L | Growth for 20+ years |
SWP setup: ₹40,000/month from Bucket 1 (liquid fund).
Refill annually: Transfer from Bucket 2 to Bucket 1.
Refill Bucket 2: When equity markets are up 15%+, transfer from Bucket 3.
SWP Calculation Examples
Example 1: Conservative Retiree
| Parameter | Value |
|---|---|
| Age | 60 |
| Corpus | ₹75 L |
| Monthly need | ₹30,000 |
| Risk tolerance | Low |
| Horizon | 25 years |
Setup:
- Fund: Conservative Hybrid (7-8% expected return)
- SWP: ₹30,000/month (4.8% withdrawal rate)
- Expected outcome: Corpus lasts 25+ years
Example 2: Balanced Retiree
| Parameter | Value |
|---|---|
| Age | 55 (early retirement) |
| Corpus | ₹2 Cr |
| Monthly need | ₹60,000 |
| Risk tolerance | Moderate |
| Horizon | 30+ years |
Setup:
- Fund: Balanced Advantage (9-10% expected return)
- SWP: ₹60,000/month (3.6% withdrawal rate)
- Expected outcome: Corpus grows over time
Example 3: Growth-Oriented
| Parameter | Value |
|---|---|
| Age | 50 (very early retirement) |
| Corpus | ₹3 Cr |
| Monthly need | ₹75,000 |
| Risk tolerance | High |
| Horizon | 35+ years |
Setup:
- Fund: Flexi-cap + Balanced (11-12% expected return)
- SWP: ₹75,000/month (3% withdrawal rate)
- Expected outcome: Significant corpus growth, can increase SWP
Adjusting SWP for Inflation
Annual Increase Method
| Year | SWP Amount | Inflation Adjustment |
|---|---|---|
| 1 | ₹40,000 | Base |
| 2 | ₹42,400 | +6% |
| 5 | ₹50,500 | +6% compounded |
| 10 | ₹67,600 | +6% compounded |
Increase SWP by 5-6% annually to maintain purchasing power.
Sustainability Check
| Withdrawal Rate | Can Support Inflation Increase? |
|---|---|
| 3% | Yes, comfortably |
| 4% | Yes, if returns are 10%+ |
| 5% | Marginally |
| 6%+ | Unlikely long-term |
Common Mistakes to Avoid
1. Starting with Too High a Rate
| Starting Rate | Risk |
|---|---|
| 3-4% | Safe |
| 5-6% | Risky for 25+ year horizon |
| 7%+ | Likely corpus depletion |
Solution: Start conservative, increase if corpus grows.
2. Using Only Equity Funds
| Scenario | Risk |
|---|---|
| Market crashes 40% | Your corpus is ₹60 L instead of ₹1 Cr |
| You continue ₹40K SWP | Now 8% withdrawal rate |
Solution: Use balanced or hybrid funds; maintain cash buffer.
3. Not Reviewing Annually
| Check | Why |
|---|---|
| Corpus value | Is it growing or shrinking? |
| Withdrawal rate | Has it crept up? |
| Fund performance | Is it meeting expectations? |
4. Single Fund Dependency
| Risk | Solution |
|---|---|
| Fund underperforms | Diversify across 2-3 funds |
| AMC issues | Use different fund houses |
Setting Up SWP: Platform Guide
Direct (AMC Website)
| Step | Action |
|---|---|
| 1 | Log in to AMC website |
| 2 | Select the fund |
| 3 | Go to SWP/Transactions |
| 4 | Enter amount, date, frequency |
| 5 | Confirm with OTP |
Through MF Central/MFU
| Step | Action |
|---|---|
| 1 | Log in to MF Central |
| 2 | Go to Transact → SWP |
| 3 | Select fund and folio |
| 4 | Configure SWP details |
| 5 | Submit |
Information Required
| Field | Example |
|---|---|
| Withdrawal amount | ₹30,000 |
| Frequency | Monthly |
| SWP date | 5th of each month |
| Start date | Next month |
| Bank account | Your savings account |
Conclusion
| Decision | Recommendation |
|---|---|
| Fund type | Balanced Advantage for most retirees |
| Withdrawal rate | 3-4% for 25+ year safety |
| Inflation adjustment | Increase 5-6% annually |
| Tax efficiency | Prefer equity-oriented funds |
| Review frequency | Annual comprehensive review |
SWP advantages over traditional pension:
- Higher returns (8-12% vs 5-7%)
- Tax efficiency (LTCG vs slab rate)
- Flexibility (change amount anytime)
- Liquidity (access corpus if needed)
- Inflation hedge (can increase withdrawals)
Your employer may not give you a pension, but with proper planning, SWP can create a better one.
Calculate your pension SWP: Use our SWP Calculator to design your monthly income plan.