SIP vs SWP

SIPs and SWPs have distinct functions. SIPs help you reach your investment goals, while SWPs offer a steady stream of cash flow. Combining the two allows you to both achieve your investment objectives and benefit from regular cash inflows.
SIP vs SWP
3 mins read
21-September-2024

The rising popularity of mutual fund investments has prompted investor curiosity about various related terms. SIP and SWP happen to be the two most commonly searched terms. SIPs allow investors to invest a fixed sum of money regularly into MF schemes, while SWPs allow investors to withdraw a fixed sum of money at regular intervals from their investments. In other words, SWPs are the opposite of SIPs.

Understanding the SIP (Systematic Investment Plan) versus SWP (Systematic Withdrawal Plan) debate is crucial for any investor looking to optimise their financial strategies. In this article, we’ll explore the fundamentals of SIPs and SWPs, along with their key differences. While SIPs focus on investing a fixed amount regularly to benefit from rupee cost averaging, SWPs allow investors to withdraw a predetermined sum at regular intervals, making them ideal for generating income. Grasping these concepts will empower you to make informed decisions tailored to your financial goals.

What is Systematic Investment Plan (SIP)

SIP is a strategic approach to mutual fund investments where you invest a fixed amount of money into mutual fund schemes of your choice at regular intervals. These regular intervals can be daily, weekly, monthly, or quarterly. SIPs work on the simple principle: you invest in mutual funds with small and regular contributions to build a corpus over time due to the power of compounding and Rupee cost averaging. While perfect for long-term wealth creation, SIPs can also be used to meet short-term goals. Therefore, SIPs provide a streamlined route to goal-based investing. Furthermore, most mutual fund SIPs can be started with a nominal sum of Rs. 500. In other words, SIPs allow investors to gain benefits of market-linked returns with regular and manageable contributions instead of hefty lump-sum deposits, which may not be feasible for all investors.

What is Systematic Withdrawal Plan (SWP)?

To understand the SIP vs. SWP debate, it's essential to understand what an SWP is. A systematic withdrawal plan or SWP is also a mutual fund strategy that allows investors to redeem a fixed amount from their MF investments at regular intervals. Under SWP, you purchase units of a low-risk mutual fund scheme and then provide instructions to redeem fixed amounts at preset intervals. On the set date, the fund sells the units equivalent to your stated amount and transfers the sum to your bank account. Depending on your cash flow requirements, you can select the withdrawal amount and frequency for the SWP. In fact, you can also choose to withdraw just the capital appreciation. Like SIPs, SWPs can also have weekly, monthly, or quarterly withdrawal frequencies.

Difference between SIP and SWP

Understanding the SIP vs. SWP debate is crucial for investors stepping into the mutual fund arena for the first time. Most beginners prefer a systematic approach - be it in investing or withdrawing. That’s why acknowledging the nuances of the SWP vs. SIP debate becomes essential. The primary difference between SIPs and SWPs is that the former focuses on wealth accumulation, while the latter focuses on income generation from existing investments. More nuances of the SWP vs. SIP comparison are explained in detail below to help investors make informed financial choices:

1. Benefits

SIPs require regular contributions, helping investors cultivate disciplined savings and investment habits. SIP investments are spread over a long period to minimise the impact of market volatility. This means you do not have to time the market to make your investments. Additionally, you can enjoy the benefit of Rupee cost averaging, whereby you purchase more MF units when the market is down and fewer units when the market is up, lowering the average cost of each unit. This makes SIPs one of the best investment tools to build long-term wealth.

SWP, on the other hand, offers investors a regular source of income since a part of the investment can be redeemed at regular intervals. A regular flow of income keeps your financial needs covered. Additionally, you have the power to tailor the amount to be withdrawn as well as the frequency of withdrawals to match your requirements.

2. Suitability

In an SIP vs. SWP head-to-head comparison, suitability is an important consideration for investors. SIPs are suitable for those seeking long-term wealth creation with regular and manageable contributions. In other words, if you are willing to save and invest regularly in a market-linked product, SIPs should be your top choice. SIPs are perfect for small investors who find it difficult to invest lump-sum funds at once.

SWPs are tailored for investors seeking a steady and reliable regular income. Investors like retirees can opt for the SWP option when investing in mutual funds to ensure a steady income flow. SWPs can also come in handy for investors who have certain outstanding monthly payment obligations like EMIs, school or college fees, etc. SWP payouts can be used to cover such expenses every month.

3. How does it work?

If you’re wondering which is better between SIP and SWP, you should also consider how each plan operates. SIPs are relatively simple. Investors contribute a fixed sum at regular intervals, regardless of the market conditions. The money contributed is used to buy MF units. The number of units purchased depends on the NAV of the MF units. When the market is low, more units are purchased, and when the market is high, fewer units are purchased.

Under SWPs, the investor initially invests a large corpus into MF schemes. They instruct the fund house to redeem a certain sum of money at regular intervals. The fund house sells MF units from the investor’s portfolio at their prevailing NAV to meet the set requirement.

4. Tax implication

The SIP vs SWP debate also offers insights into how each of these systematic schemes is taxed. As such, SIPs are investment avenues and do not attract taxes. Taxes on SIP investments are applicable only when these investments are redeemed. Moreover, investors can even claim tax deductions on their SIP investments. For instance, if you invest in ELSS funds, you can claim a tax deduction of up to Rs. 1.50 lakhs per annum u/s 80(C).

SWPs, on the other hand, are strictly withdrawals and therefore attract taxes. While there is no tax deducted at source (TDS) on SWPs, a capital gains tax is applicable as per the scheme type and the holding period of the funds. For equity funds, gains withdrawn in less than a year attract a 20% short-term capital gains tax, while if MF units are sold after a year, gains exceeding Rs. 1 lakh are taxed at 12.5%. For debt funds, both long and short-term gains are taxed as per your applicable income tax slab.

SIP vs SWP – Comparison Table

If you still need clarity on the SWP vs. SIP comparison, here’s a comprehensive table that sums up their differences succinctly:

Parameter SIP SWP
Purpose SIPs connote regular investments in mutual fund schemes. SWPs connote regular withdrawals from mutual fund schemes.
Goal SIPs are geared towards the goal of wealth accumulation over time. SWPs are geared towards generating income from existing investments.
Suitability SIPs are suitable for investors of all ages looking to build a wealth corpus with disciplined and regular investment. SWPs are suitable for investors like retirees who are seeking regular and stable income flows.
Cash flow movement Money is debited from your account and is used to purchase MF units. The fund house sells units from your portfolio and transfers the sum to your bank account.
Taxation SIPs are taxed on withdrawals. Contributions to certain types of SIPs are also eligible for tax deductions u/s 80(C). SWPs are taxed according to the holding period of the units and the type of MF scheme in question.



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How does SIP work?

1. Investment process:

SIP allows investors to contribute a fixed sum regularly—monthly, quarterly, or annually—into a mutual fund scheme. This method ensures disciplined investing over time.

2. Rupee cost averaging:

By investing a fixed amount, investors buy more units when prices are low and fewer units when prices are high. This averaging reduces the overall cost per unit and minimizes the impact of market volatility.

3. Compounding benefits:

Regular investments in a SIP take advantage of compounding, where the returns earned on investments generate their own returns. This can significantly enhance the growth of your investment over the long term.

4. Flexibility:

Investors have the option to start, stop, or modify their SIP contributions based on their financial situation. This flexibility helps adapt to changing market conditions and personal financial needs.

5. Long-term focus:

SIPs are typically used for long-term financial goals, such as retirement savings, children’s education, or purchasing a home. They encourage a disciplined investment approach, which is essential for wealth accumulation.

6. Affordability:

SIPs make investing accessible, allowing individuals to start with smaller amounts. This affordability encourages a broader range of investors to participate in the market.

7. Ease of management:

Most mutual fund companies provide user-friendly online platforms to set up and manage SIPs, making the process convenient and straightforward for investors.

How does SWP work?

1. Withdrawal process:

SWP allows investors to withdraw a fixed amount of money from their mutual fund investments at regular intervals, such as monthly or quarterly. This creates a consistent income stream.

2. Investment flexibility:

Investors can choose the amount and frequency of withdrawals, providing flexibility to adapt to changing financial needs or life events.

3. Capital gains management:

By withdrawing regularly, investors can manage capital gains more effectively, as they can withdraw from their gains rather than their initial investment, potentially optimising tax implications.

4. Ideal for income generation:

SWPs are particularly useful for retirees or those looking for regular income from their investments, as they convert invested capital into liquid cash without needing to sell the entire investment.

5. Market volatility mitigation:

SWPs can help mitigate the impact of market fluctuations. Since withdrawals are based on a fixed amount, the investor isn't forced to sell units during market downturns.

6. Long-term investment strategy:

While providing regular income, SWPs still allow the remaining investment to grow, offering a balance between liquidity and long-term wealth accumulation.

7. Ease of management:

Like SIPs, SWPs can be easily managed through online platforms provided by mutual fund companies, making them convenient for investors.

Which is better between, SIP or SWP?

Some investors may still be wondering about which is better: SIP vs. SWP. The answer is simple. While both are systematic mutual fund vehicles, SIPs help you systematically invest, and SWPs help you systematically withdraw your MF investments. Therefore, choosing which is better–SIP vs. SWP depends entirely on your requirements. If you’re a beginner or a small investor looking to start MF investments with piecemeal contributions, SIPs are the way to go. However, if you're an investor with an existing MF corpus seeking regular cash flow from your investments, SWPs would be the ideal choice. In fact, you don’t always need to choose one over the other. You can start with SIP investments today. You can opt for an SWP after 15 years once you have a corpus in place.

Conclusion

In summation to the SIP vs. SWP debate, it can be stated that both these strategies offer their own sets of benefits to investors. Both these strategies help you enjoy the benefits of rupee cost averaging and compounding while avoiding the pitfalls of market timing. However, SIPs and SWPs have different purposes and objectives, making them suitable for different investors. While SIPs are designed to help investors achieve their financial goals and build long-term wealth, SWPs are focused on generating a stable and consistent income stream for investors. Therefore, when deciding which is better–SIP vs. SWP–you must carefully consider your financial goals, investment objective, and cash flow needs.

Whether you choose the SIP route for investing or the SWP route for withdrawals, having a trusted partner on your MF journey can make all the difference. This is why you should rely on the Bajaj Finserv Mutual Fund Platform. On this smart platform, you can compare 1000+ mutual funds and start SIP investments from just Rs. 100 onwards! You can even estimate your returns with the mutual fund calculator tool online to fine-tune your financial plans.

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Frequently asked questions

Which is better, SWP or SIP?

Choosing between SWP and SIP depends on your financial goals. If you're looking to build wealth through disciplined investing, SIP is ideal. Conversely, if you need regular income from your investments, SWP offers flexibility and liquidity. Assess your needs to determine the best option for you.

What are the disadvantages of SWP?
A significant disadvantage of an SWP is that when the market is down, more units of your MF investment need to be sold to match your withdrawal needs.

Can I do SIP and SWP together?

Yes, you can effectively combine SIP and SWP to optimise your investment strategy. By using SIP for regular investments to build wealth while simultaneously implementing SWP for generating a steady income stream, you can achieve a balanced financial approach that caters to both growth and liquidity needs.

Is SWP a good idea?

SWP can be a smart choice for investors seeking regular income while maintaining their investment portfolio. It offers benefits like tax efficiency, consistent cash flow, and liquidity. By withdrawing systematically, you can access funds without completely liquidating your investments, making SWP an effective strategy for managing financial needs.

What is the 4% SWP rule?

The 4% SWP rule is a guideline suggesting that retirees can withdraw 4% of their investment portfolio annually without significantly depleting their funds over a 30-year retirement. This approach aims to balance income needs while preserving capital, offering a sustainable withdrawal strategy adjusted for inflation.

Is SWP tax-free?
No SWPs are not tax-free. SWPs are taxed according to the type of MF scheme in question and the holding period of the scheme. For instance, if you have invested in an equity MF and withdrawn before a year, your gains will be taxed as short-term capital gains at 20%. If such withdrawals happen after a year and the gains exceed Rs. 1 lakh, a 12.5% long-term capital gains tax will be applicable.

Can I withdraw SIP anytime?
Yes, you can withdraw from your SIP at any time. However, you should be mindful of the applicable exit loads levied on withdrawals before a pre-given tenure (usually 1 year).

Can I start SWP immediately?
You can start SWP immediately if you have invested a lump-sum amount. For equity plans, it makes more sense to start SWPs after a year to avoid the 20% short-term capital gains tax.

How long does SWP last?
SWPs last as long as you have enough MF units in your portfolio or as long as you wish to continue the plan.

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Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed.

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