Both Systematic Investment Plan (SIP) and Systematic Withdrawal Plan (SWP) are popular investment strategies mainly associated with mutual funds. SIPs allow investors to systematically invest a fixed amount at regular intervals, promoting systematic wealth accumulation over time. SWPs facilitate systematic withdrawal of funds at predetermined intervals, providing investors with a steady stream of income while potentially preserving the principal amount.
Let us now understand each one in detail.
What is SIP?
SIP is an investment method where the investor regularly contributes a fixed amount at predefined intervals to a mutual fund scheme of his choice.
SIPs are popular because they offer a systematic approach to investing and allow investors to benefit from rupee cost averaging and compounding over time.
SIPs allow you to invest a fixed amount like Rs 500 or Rs 1000 on a regular basis – weekly, monthly or quarterly. This is similar to a fixed deposit, but you invest in the stock market through mutual funds.
What is SWP?
SWP is the opposite of SIP, which is used for investments. SWP is a feature provided by mutual funds that allows you to withdraw funds from your existing investments on a regular basis.
Simply put, this is a facility provided by mutual funds that allows investors to withdraw a fixed amount or a specific number of units from their mutual fund investments on a regular basis, thereby providing a steady source of income.
SIP and SWP: Here are the key differences between the two:
purpose:
SIP: SIP is mainly used to regularly invest money in mutual funds. Investors can achieve long-term financial goals by investing a fixed amount at regular intervals (weekly, monthly, quarterly, etc.).
SWP: SWP is used to withdraw funds from mutual funds on a regular basis. This allows investors to repay a fixed amount of funds on a regular basis, providing a steady source of income during the withdrawal phase.
step:
SIP: Typically used during the accumulation phase where investors build wealth by investing money regularly over a long period of time.
SWP: Utilized during the distribution phase when investors seek to generate a regular stream of income from their investments.
frequency:
SIP: Investors can choose the frequency of investment: monthly, quarterly, annually, etc.
SWP: Investors can choose the frequency of withdrawals: monthly, quarterly, or annually.
process:
SIP: Investors invest in a mutual fund scheme of their choice after authorizing the bank to withdraw a fixed amount from their account at regular intervals.
SWP: Investors specify how much and how often they wish to withdraw. Mutual funds sell units to meet withdrawal requests and the proceeds are deposited into the investor's bank account.
Tax implications:
SIP: Investments made through SIPs are taxable depending on the mutual fund type (equity or debt) and holding period.
SWP: The tax implications of SWP depend on whether the mutual fund from which withdrawals are made is an equity fund or a debt fund and the holding period of the units being redeemed.
danger:
SIP: The risks associated with SIP mainly depend on the type of mutual fund (equity, debt or hybrid) in which it is invested.
SWP: The risks associated with SWP depend on market conditions at the time of withdrawal and the type of mutual fund from which the withdrawal is made.
purpose:
SIP: Helps in systematic investment and long-term wealth accumulation.
SWP: Provides a systematic way to generate regular income during retirement or any other phase where you need regular cash flow.
Choose between SIP and SWP:
Although both SIPs and SWPs involve regular investments in mutual funds, they serve different purposes at different stages of an investor's financial journey. SIP helps in accumulating wealth while SWP helps in generating regular income.
SIPs are for wealth building, while SWPs are for generating income from existing investments. You can also use the two together. For example, you can use SIP to accumulate corpus and then convert it to SWP to generate retirement income.
disclaimer: The expert views and investment tips contained in this News18.com report are the opinions of experts and not the opinions of the website or its management. Readers are advised to check with certified professionals before making any investment decisions.