SIP vs SWP - Difference, Examples, Benefits

Choosing the right investment can be difficult for investors when numerous options are available in the market. SIP is one of them and stands out as a popular choice in mutual funds since it encourages investors to goal-oriented savings at regular intervals while SWP is a Systematic withdrawal plan which allows investors to generate regular income.

In this article, We’ll know more about SIP vs SWP, and how they work. Which is a better option for investors? Furthermore, we’ll provide valuable information about the differences between SIP and SWP which will help you in your investing journey.

What is SIP?

SIP (Systematic Investment Plan) is a mode of investment that involves systematically investing a fixed sum in the desired mutual fund schemes on regular intervals such as daily, weekly, monthly, quarterly, or semi-annually. Moreover, it offers different types of plans for various kinds of investors according to their objectives and income.

This method of investment is particularly beneficial for small investors as it allows them to invest in equity and debt markets even with a small amount of Rs.100. 

When you invest in SIP,  you are purchasing units of mutual funds at their net asset value (NAV) during each investment cycle. The value of NAV fluctuates daily, as a result, you purchase different proportions of NAV in each investment cycle. 

This means you'll be allocated more units in Mutual funds when the prices are low and fewer units in Mutual funds when the prices are high. This investment method provides rupee cost averaging and compounded returns to the investor. 

To learn about the different types of SIPs and discover the best SIP for long term investment goals, read our latest blogs!

Example of a Systematic Investment Plan (SIP):

Say you are investing Rs.1,000 every month as your SIP installment. 

Now, if the first month's NAV per unit happens to be Rs.20, you will be allocated 50 units, Next month, the NAV per unit goes up to Rs.25 due to which you will be allocated 40 units. In both cases, a fixed amount of Rs.1000 will be invested, but the number of units that shall be acquired will differ by NAV. 

So Buying different NAV units for the same installment amount averages out your cost of purchasing units. Since the market will be in the uptrend for the long term, NAV unit prices are expected to rise in the long term. Hence it is called the benefit of rupee cost averaging.

Benefits of SIP:

1. Systematic Investment Plans offer compounding returns, which is a good option for investors looking at long-term growth. 
   

2. It is very useful for investors with less capital base as it helps them to invest in small amounts at frequent periods which in turn accumulates wealth in the long term
   

3. Some SIPs are also flexible as they allow investors to change investment plans in between the investment period depending on the prevailing financial condition.

4. SIPs offer rupee cost averaging, which is a principle of mitigating the volatility in the market. Thus investors do not need to worry about the volatility in the market. 

What is SWP?

SWP (Systematic withdrawal plan) is a type of mutual fund plan that allows you to systematically withdraw fixed amounts that you already invested in a mutual fund scheme. 

It works exactly opposite to the SIP as Investors withdraw predecided sums at regular intervals, such as, monthly, quarterly, semi-annually, or annually and the AMC will credit the money to their bank account.

Fund house generates this cash by selling NAV units according to the SWP plan specified by the investor. The investor can select any day of the month/quarter/year for withdrawal according to his need. 

Example of a Systematic Withdrawal Plan (SWP):

Suppose you have accumulated 20,000 NAV units in a mutual fund and you opted for an SWP of Rs.20,000 per month.

So for the first month, the price of the NAV per unit is Rs.25, then the mutual fund house will sell 800 units in that month to pay you Rs. 20,000 per month (Rs.25*800 units). Therefore, you will be left with 19,200 units in your mutual fund scheme. (20,000 units - 800 units)

In the second month, if the NAV price rises to Rs.40 per unit, then the fund house will only have to sell 500 units to pay you Rs. 20,000 (Rs.40*500 units). Thus, you are left with 18,700 units in your mutual fund scheme

In Both cases, you will get a fixed amount of Rs.20,000 but the number of units that are sold are different. Hence it averages your cost of getting regular income and saves your investment from the effects of market volatility.

Benefits of SWP:

1. A systematic Withdrawal Plan is a facility that assures a reliable source of regular income with the option for the systematic withdrawal of a fixed sum at set intervals from one's investments. It is especially useful for retirees or those who require a constant flow of cash for daily expenses.

2. One of the main advantages of SWP is flexibility. Investors can decide on the amount they want to withdraw and how frequently they want these withdrawals: monthly, quarterly, or yearly. This all works together to help individualize the plan to financial needs and goals.

3. SWP allows one to set automatic withdrawals at set intervals, thereby assuring consistent income without the hassle of manual management. Moreover, investors can always stop or change withdrawals, hence staying in charge of their investment, enabling them to adjust to the dynamics of their financial situations.

Differences between SIP and SWP

SIP vs SWP, Which is better?

SIP and SWP both are strategic and disciplined approaches for one who wants to save money for future needs and also for one who wants regular income to meet their financial needs.

As we discussed earlier both approaches are better and can be chosen based on the requirements of the investor. 

SIPs are quite easy and affordable for investors who start investing in their early stages as they may not have a huge corpus. For instance, if person A gets a job at the age of 23 and is earning his regular income, he can use a part of his salary to invest in SIP for future needs. After some years of investing, when it accumulates into a huge corpus, he can also convert that SIP into SWP only if he wants to get a regular income. 

On the other hand, SWP is for those who have huge amounts of money or already invested a huge corpus in a mutual fund and expect a periodic income. For instance, if person B retires at the age of 60 and has accumulated wealth through mutual over the years. Person B can now choose the SWP option to get regular income. So for old people, retirees, and senior citizens, SWP is quite a good and strategic option to meet their financial goals.

Find out more about other similar investment options such as SIP vs RD and SIP vs FD in our Rupeezy blogs

Conclusion

Mutual funds have enormously grown in the financial market in India over the years. By changing customer needs and market dynamics, SIP and SWP have become one of the most disciplined and strategic options for investors to invest and withdraw their amount systematically from mutual funds.

So wrapping it up, We covered the topic of SIP vs SWP, their benefits, and their key differences. Hope this article will give you an idea about SIP and SWP, and which investment option is suitable to your financial goals. However, Investors are advised to do their research before investing in any options.