Mutual funds offer flexible options to meet the evolving financial needs of investors. Easing both the investment and expenditure phases of life, they offer a scheme for both. It is provided in the form of SIP and SWP. While SIP focuses on the steady growth of money via regular investments, the SWP offers a structured way to access the invested funds. Though it is the key differentiating factor between the two, there is more to know about these. Uncover the same here.

What is SIP?

Systematic Investment Plan (SIP) refers to the periodic investment of a specific amount in mutual funds. The period can be every day, week, month or quarter. The investments are flexible and can be increased depending on the changing financial situations. SIPs can be paused or stopped at the user’s convenience. It offers compound growth of funds and also protection from market volatility. Further, the small investments also prevent the burden of a bulk investment in one go. The SIPs are also of different types and help easily achieve financial goals.

What is SWP?

A Systematic Withdrawal Plan (SWP) allows for obtaining periodic returns. The investors can receive a fixed amount from their mutual fund investments at specific intervals. SWP involves investment in low-risk mutual funds and setting up the SWP at preset intervals. The funds are then sold on the set date for a value equal to the stated amount. The obtained returns are deposited into the bank account. The set return period can be a week, a month, or a quarter based on individual requirements.

Difference Between SIP and SWP

Investment in mutual funds can offer the benefits of wealth growth. However, identifying the available options helps make the investment journey smooth by taking advantage of the available flexibility. SIP and SWP are effective options to manage one’s finances over time. Hence, here is the difference between the two for a clear understanding:

Working Method

SIP simply requires the deposition of a fixed amount at regular intervals. The investment is spent on buying the mutual fund units, where the number of purchased units is based on the Net Asset Value (NAV) of the units. Hence, the low market involves the purchase of a larger number of units, but the high market involves the purchase of fewer units. The periodic investment, hence, allows alignment with changing market conditions.

SWP works by investing in mutual fund schemes, which can be redeemed at a specific interval as per the investor’s decision. To provide the amount from the investment, the mutual fund units are sold equivalent to the required amount at the existing NAV. The obtained funds are received by the investor in their bank accounts.

Benefit

SIP offers wide benefits, such as allowing for maintaining discipline in investment, enabling portfolio diversification, offering compound growth of money, and protecting from market volatility through rupee cost averaging.

SWP is an effective choice to use mutual funds for regular income. It helps meet the financial needs during the period defined by the investor. Hence, SWP allows informed usage of funds along with the flexibility to modify the future course of action regarding fund utilisation.

Suitability

SIPs are well-suited for individuals interested in investing regularly and in small amounts rather than a lump sum. Hence, it fits into the finances of a large population. It is also appropriate for long-term financial planning while also meeting the needs of short-term investments. The ELSS fits in the latter criteria.

SWPs are well-suited for senior citizens and retired individuals. They offer a stable and regular source of income based on the previous investment of the individuals. It helps meet needs like EMI payments, fees, or other constant expenses.

Tax Implications

The tax benefits of SIP depend on the redemption method. Further, in the case of ELSS, the investors can claim tax benefits under Section 80C of the Income Tax Act. The limit for the overall claim is INR 1.5 lakhs annually.

The tax benefits of SWP depend on the redeemed fund type, such as debt or equity-oriented. The debt fund taxation rules will be applicable to such funds depending on the holding period of more than or less than three years. Similarly, equity fund taxation rules will be applicable to such funds based on whether the holding is more or less than one year.

SIP vs SWP: Comparison Table

The simple SWP vs SIP comparison for a quick glance is as follows:

Factors to Consider When Choosing Between SIP and SWP

The choice between SIP and SWP can be made based on the following factors:

• Financial goals: If the aim for investment is wealth accumulation, disciplined investment or any long-term goals, the SIP is beneficial. Otherwise, the aim of regular income can be fulfilled by SWP.

• Investment stage: The earning phase is best to begin the SIP, while the spending or retirement phase is suitable for beginning SWP.

• Risk appetite: The SIP can be done in both equity and debt mutual funds. Since quality returns are needed for SWP, low-risk or stable funds are an appropriate choice.

Final Words

Having understood what is SIP investment and SWP returns are, you must be clear that both are effective fund management strategies. However, the question arises, SIP or SWP, which is better? The answer lies in specific financial situations and goals. SIP is a better option to enhance wealth over time, especially during earning years. SWP is a companion to meet the fund requirements from the existing corpus in the later stage of life. Identifying the goals of investment and a thorough review of specific circumstances will offer the answer about the better option for you between SIP and SWP.

SIP does not assure a profit or guarantee protection against loss in a declining market.

The Tax calculation shown above is for illustration purpose and general information only. Investors are advised to consult their Tax Consultant or Financial Advisor to determine tax benefits applicable to them.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.