Navigating mutual fund investments involves getting acquainted with various terms, notably Systematic Investment Plan (SIP) and Systematic Withdrawal Plan (SWP). Both serve distinct purposes in the investment journey, but how do you decide on sip or swp which is better for you? Let’s explore the difference between sip and swp to make an informed decision tailored to your financial aspirations.
Systematic Investment Plan (SIP)
A Systematic Investment Plan (SIP) offers a disciplined way to invest in mutual funds. Through SIP, you can allocate a fixed sum of money at regular intervals—monthly, quarterly, or any other chosen period—into a selected mutual fund.
Advantages of SIP
- Consistent Savings: SIP fosters a culture of regular saving, essential for accumulating wealth over time. Setting aside a fixed sum regularly turns saving into a habit, akin to a routine bill payment.
- Rupee Cost Averaging: By investing consistently, you navigate through market fluctuations more smoothly. As prices vary, you buy more units when the cost is lower and fewer when it’s higher, which can reduce the average investment cost.
- Power of Compounding: The magic of compounding takes effect when your investment earnings generate their own earnings. Over the years, this can significantly boost your investment value.
- Flexibility: SIPs are versatile, offering you control over the amount, timing, and choice of funds. With the low threshold for starting investments, SIPs make investing achievable for everyone.
How Does SIP Work?
- Initial Process Setup: You choose a mutual fund scheme by taking into account your time horizon, risk tolerance, and investment objectives. You choose how much you want to invest and how often to invest at each interval.
- Investments made automatically: After the SIP is established, the designated sum is taken out of your bank account and deposited at prearranged intervals in the mutual fund plan of your choice. Because of this automation, investments are guaranteed to continue without needing constant human intervention.
- Purchase of Units: Your money is invested and, at the moment of investment, it purchases units of the mutual fund scheme at the Net Asset Value (NAV) in effect. Your acquisition quantity is determined by the NAV at the time of purchase. You get fewer units if the NAV is high, and more units if it is low.
- Growth and Compounding: As long as you keep making consistent investments, your mutual fund holdings increase in value. The compounding effect may work in favour of the investments, particularly if the mutual fund’s earnings are reinvested.
- Rupee Cost Averaging: Rupee cost averaging is advantageous if you make investments regularly. You may purchase more units at low prices and fewer units at high prices if you invest a certain amount regularly. Using this method over time may lower the average cost of your assets.
Dreaming of financial freedom? Use our Online SIP Calculator to see how regular investments can add up to grow wealth. Take the first step towards your goals. Calculate now!
Systematic Withdrawal Plan (SWP)
SWP is a strategic way for investors to extract funds from their mutual fund investments at regular intervals, providing a consistent flow of income. This makes it particularly appealing for those requiring regular cash inflow, like retirees.
Benefits of SWP
- Regular Income Stream: By setting a fixed withdrawal amount, SWP ensures a stable income stream, allowing you to enjoy regular payouts without depleting your investments entirely.
- Tax Efficiency: Withdrawals via SWP can often be more tax-efficient compared to other income sources, as the tax implications may vary based on the withdrawal’s nature (capital gains or principal) and the investment duration.
- Investment Continuity: Even as you withdraw funds, the remaining investment portion has the potential to grow. This balance ensures you continue generating income while keeping your investment portfolio active.
How Does SWP Work?
- Selection of Mutual Fund and Amount: You begin by deciding which mutual fund plan to withdraw money from and how much you want to remove regularly.
- Withdrawal Mechanism: Units equal to the desired withdrawal amount, at the current NAV, are sold from your mutual fund holdings. For instance, if you plan to withdraw Rs. 3,000 monthly and the NAV is Rs. 10, then 300 units are sold (Rs. 3,000 / Rs. 10 = 300 units).
- Impact on Holdings: Each withdrawal reduces the number of units you hold in the mutual fund scheme. Continuing the example, if you started with 10,000 units, after a withdrawal of 300 units, you would be left with 9,700 units.
- Variable Unit Redemption: Depending on the NAV in effect at the time of the withdrawal, the number of units sold for each withdrawal may vary. Fewer units are sold to cover the withdrawal amount if the NAV increases; more units are required if the NAV decreases.
- Planning for Sustainability: A well-designed SWP may provide a steady income stream while maintaining the growth potential of the remaining investment.
All you Need to Know About SIP vs SWP
| Feature | SIP (Systematic Investment Plan) | SWP (Systematic Withdrawal Plan) |
| Purpose | To invest a fixed amount at regular intervals into a mutual fund. | To withdraw a fixed amount at regular intervals from a mutual fund investment. |
| Benefit | Facilitates disciplined savings and benefits from rupee cost averaging and compounding. | Provides a regular income stream, potentially tax-efficient withdrawals. |
| Ideal For | Investors looking to build wealth over time. | Investors needing regular income from their investments, such as retirees. |
| Impact of Market Volatility | Buys more units when prices are low and fewer when high, averaging the cost. | Requires careful planning to ensure withdrawals do not significantly deplete the investment during market downturns. |
| Tax Implications | Subject to capital gains tax based on the duration of investment. | Each withdrawal can have tax implications, depending on the amount withdrawn as capital gains. |
| Flexibility | Offers flexibility in terms of investment amount, frequency, and mutual fund selection. | Allows investors to choose the withdrawal amount and frequency, providing income as needed. |
| Strategy Phase | Wealth accumulation phase. | Wealth distribution phase. |
Conclusion
Choosing between SIP (Systematic Investment Plan) and SWP (Systematic Withdrawal Plan) isn’t about which is better overall, but which is better for your specific financial goals and life stage.
SIPs are excellent for building wealth over time, perfect for those in the wealth accumulation phase.
SWPs, on the other hand, are designed for generating regular income from an already accumulated corpus, appealing mainly to retirees or anyone needing steady cash flow.
Your choice should align with whether you’re currently looking to grow your wealth or if you need regular income from your investments.
FAQs
Which is better, SIP or SWP?
The choice between SIP and SWP depends on your financial goals and phase of life. SIPs are better for accumulating wealth over a long period, especially if you’re in the wealth-building phase of your life. SWPs are more suited for those who have already built a corpus and are looking to generate a regular income from their investments.
Can I combine SIP and SWP?
Yes, combining SIP and SWP can be a strategic approach to manage your investments and cash flow. This twin strategy allows you to continue building your wealth while also receiving a regular income, ensuring that you meet both your short-term and long-term financial goals.
What is the tax impact on SIP and SWP?
For SIPs, especially in ELSS schemes, investors can claim a tax deduction of up to INR 1,50,000 under Section 80C. In contrast, SWPs have tax implications because each withdrawal is considered a redemption and is subject to capital gains tax. The tax rates differ for equity and debt funds and depend on the duration the investments are held.
