Planning your investments and withdrawals can make a huge difference in achieving your financial goals. SIP and SWP are two common tools that help you invest and withdraw money as per convenience.
In the world of mutual funds, SIP and SWP are two sides of the same coin – one helps to multiple and the other helps to make use of it wisely.
Systematic Investment Plan:
Systematic Investment Plan (SIP) is a simple, straightforward and an effective method of regularly investing in mutual funds. Instead of making a large one-time investment, one can invest a fixed and small amount each at regular intervals. This approach helps you build your wealth gradually and reduces the risk associated with investing an ad hoc sum all at once.
Example:
If you invest INR 1,000 per month in a mutual fund with an average annual return of 12% for a duration of 1 year, the investment will reap INR 12,809 as the final amount. The 12% interest rate is broken down month-wise, which amounts to as 1% per month (the 1% per month equals to 0.01 as the rate (1/100=0.01)). In essence, SIP is a simple and effective way to invest in mutual funds, helping you build wealth over the long term in a disciplined and convenient manner.
Compared to investing a lump sum amount, SIPs (Systematic Investment Plans) are a better way to invest because they help you build a habit of saving and staying financially disciplined. The returns from a SIP can go up or down depending on market conditions, so the final amount you earn may vary.
Systematic Withdrawal Plan:
While some investors seek capital growth, some others want regular income from their investments. The facility extended by fund houses to meet these expectations is called as Systematic Withdrawal Plan (SWP).
Systematic Withdrawal Plan is a provision to allow investors to withdraw a fixed amount from a mutual fund scheme regularly. The amount and frequency of withdrawal can be chosen as per desire, wherein on a set date some units from the current portfolio are sold and the acquired monetary funds are transferred to the bank account.
The SWP offers some key benefits to the investors-
- Tax Benefits – If you opt for SWP, then there is no tax deducted at source. However, the capital gains tax (short term or long term) will be applicable depending on the type of scheme and the amount of withdrawal.
- Investment discipline – Like SIP helps you learn the disciplined style to investing, SWP helps to remain on track and not withdraw large amounts under stress, in case the market conditions go haywire.
- One can either withdraw a fixed amount or only the capital appreciation, which offers some flexibility to the investor.
How is SIP different from SWP:
Like mentioned above, both SIP and SWP are related to mutual fund investments, but they serve opposite purposes. SIP is used for regular investments to generate more wealth for long-term goals mostly, while SWP is used to withdraw money regularly from the present investments, often to generate regular income.
You would typically use SIP to build up your investments over time and then use SWP when you need to start drawing income from those investments. While both the plans are responsible for giving more money, what is more suitable or ideal for a person is completely dependent on what the purpose and requirement is. In fact, on doesn’t need to choose one option over the other.
| Criterion | SIP | SWP |
| Goal | Wealth accumulation over time | Generating income for existing investments |
| Taxation | Taxed during withdrawals (Dividend Distribution Tax or Capital Gains tax – whichever applicable) | Taxes as per the holding period of the units and the type of mutual fund scheme chosen |
| Suitability | For investors of all ages looking to build a corpus with periodic investments | For investors like retired individuals/self-employed who seek regular income |
| Cash Flow | Money is debited from the bank account to invest in mutual fund scheme | The fund scheme sells units from the portfolio as per the market condition and date, with amount coming to the account. |
Any investor can begin with their SIP investments today and opt for the SWP scheme after a long time period, once a sufficient balance is in place, and make the best utilization of both the financial plans.