SIP vs SWP
Lets try to understand what is SIP and SWP, how it works and how they're different..
In India, you must have seen the TV Advertisement about Mutual Funds that goes with the tagline - “Mutual Funds Sahi Hai” which means “Mutual Funds is right”. When it comes to investment and attracting the retail investors in India, Mutual Funds have come a long way. Retail investors consisting of small investors like government employees, salaried professionals, self-employed, businessmen, etc have found the convenient way of investing their money through Mutual Funds and a better alternative to fixed deposits (FDs) which hardly give them good return. Instead of investing directly in the market which requires a lot of time and effort you invest through Mutual Funds. With MFs your money is managed by fund managers who are considered as financial experts.
Not sure which funds to pick? Check out this article : Top 10 Mutual Funds to Invest in 2024.
Unlike delivery of stocks in your demat account, when you purchase or invest in a Mutual Fund you are allotted with some “units” or portion based upon the NAV ( net asset value ) of that fund. NAV of a fund is calculated at the end of every trading day. The value of each unit is calculated by dividing the total value of the fund at the end of that day with the total number of outstanding units. The NAV of a fund fluctuates based upon the performance of the fund which also affects the price of its each unit. That means, the investment made in a mutual fund might be risky and the value of your investment might increase or decrease over time.
To minimize the risk of investment in mutual funds, a different style of investment called SIP or systematic investment plan was introduced. Unlike lump sum investment the investor chooses to invest on a fixed date monthly beforehand. You can withdraw your money from a mutual fund at once or you get the option to withdraw systematically which is often referred to as systematic withdrawal plan or SWP. In a nutshell, SWP is just the opposite of SIP. Remember, not all mutual fund companies have the same withdrawal scheme. Some may not have the option of SWP and few may come with a locking period . It’s recommended to go through their documentation properly before buying any mutual fund.
Further In this article, we will dive deep into SIP and SWP. We are going to find out what they are, how do they work and what are the key differences between them ?
What is SIP & How it works
As mentioned above SIP is simply a scheme of investing your money into a mutual fund periodically. The scheme is offered by Mutual Fund companies where you predetermine the amount of money to debit from your bank account every month at a fixed date. Each month the money goes into buying more units into the Mutual Fund. When the prices are low more units are purchased and when the prices are high less number of units are purchased. This way SIP helps the investor to average out the cost per unit and minimize the risk of volatility into the market. You can also use an online SIP calculator to project the expected returns after certain number of years.
What is SWP & How it works
SWP stands for systematic withdrawal program. Few mutual fund companies provide the option to investors to withdraw a fixed amount from their investment on a monthly basis. Each withdrawal redeems the number of units left into a mutual fund equivalent to the amount withdrawn. One can take out the cash from the fund until the entire units held by him or her are exhausted. So, SWP is suitable for investors who seek regular income and still want to remain invested into the market. Many choose smartly to wait for several years until the good corpus is accumulated through SIP and then convert into SWP to systematically take out their money as a regular income.
SIP Vs SWP - Difference between SIP & SWP
Clearly, as mentioned in the above paragraphs SIP and SWP are completely different to each other. Both schemes are offered by mutual fund companies but serve different purposes. While SIP focuses on building wealth through regular monthly investment, SWP is designed to create steady monthly income. Let’s find out what are key differences between them one by one so that you can make more planned investment decisions depending upon your need.
Purpose : SIP is meant for regular investment. Instead of lump sum investment you decide to invest an amount each month to buy the units inside a mutual fund (Also see : SIP vs Lump sum). Whereas SWP is a regular money withdrawal scheme where you decide to take out a fixed amount each month from the fund to generate regular cash flow.
Holding : In SIP money is invested into the fund which goes into buying more units of the fund. Hence the amount of Units held into the fund increases over time. With SWP, you redeem the number of units held into the fund each month to convert into cash. Thus SWP decreases the number of units held into the fund.
Cash Flow : With SIP you need to put cash into investment each month so that results in negative cash-flow. In the case of SWP, you withdraw money from investment which results in positive cash-flow.
Benefits : SIP comes with benefits like breaking your big lump sum amount into small periodic investments . Thus SIP inculcates the discipline of regular saving and investing. It also minimizes the risk of volatility into the market by leveraging upon the cost averaging. On the other hand, SWP has the benefit of giving regular monthly income. Apart from that, SWP attracts a low taxation rate in comparison to lump sum as both fall into long term capital gain (LTCG) but SWP takes out little cash in comparison to lump sum.
Target Investors : SIP suits best with investors who have a long term goal and don’t want the cash in near future. In other sense, SIP is suitable for young investors who want to create wealth systematically over time.Whereas SWP is ideal for those who are looking for continuous monthly income. Older investors who are retired from their job choose SWP for a steady stream of monthly income.