SWP vs SIP: What is a systematic withdrawal plan in mutual funds? How is it different from SIP? Know here

The Systematic Investment Plan (SIP) method has garnered attention in the last few years. People with a slight interest in investment know that SIP is something. The majority of modern investors know what a SIP means and how it works, but not many of them are aware of Systematic Withdrawal Plan (SWP).

A SWP is a good strategic withdrawal option for investors, specially retirees seeking to secure their financial future. These plans provide a consistent income stream and, more crucially, substantial tax breaks that might greatly benefit investors.
 
What is a Systematic Withdrawal Plan?
A Systematic Withdrawal Plan is a financial tool intricately woven into the world of mutual funds. It empowers investors, especially those in their retirement years, to regularly withdraw a predetermined sum from their mutual fund investments. In essence, SWPs provide retirees with a financial cushion akin to a monthly paycheque, ensuring financial stability without the hassle of actively managing an investment portfolio.
 
Why is a SWP best for retirees?
Regular income: One of the best reasons that SWP is a better investment plan after retirement is because it provides regular income. In an SWP, you may customise the withdrawal amount, frequency, and duration according to your needs. You will get an automatic transfer to your bank account.
 
The rest of the corpus keeps growing: While the SWP allows you to receive a consistent flow of income, the remaining investments in the schemes are allowed to increase over time, eventually increasing the size of your corpus. SWP averages the cost of withdrawals, whereas SIPs average the cost of buying. However, the rates of return keep changing in these mutual fund schemes.
 
Taxation: Depending on the duration of your investment, gains from SWPs can be classified as either short-term or long-term capital gains. Typically, long-term gains enjoy more favourable tax rates, leaving investors with more substantial returns.
 
Indexation Magic: Indexation comes into play, allowing investors to adjust the purchase price for inflation. This, in turn, reduces the taxable capital gains, offering significant tax savings.
 
No Dividend Distribution Tax (DDT): Unlike dividends from stocks, dividends from mutual funds under SWPs are entirely tax-free, adding another layer of tax efficiency to your financial strategy.

According to Nikunj Saraf, vice president, Choice Wealth, "In the realm of financial planning, systematic withdrawal plans (SWPs) and systematic investment plans (SIPs) are distinct strategies employed within mutual funds, each serving unique purposes.

SIP involves investing a fixed amount of capital at regular intervals (weekly, monthly, etc.) in a mutual fund scheme. This approach is ideal for wealth accumulation as it promotes disciplined investing, averages out the cost of investment over the long term, and is typically used by individuals in the wealth accumulation phase who are looking to build their investment portfolio gradually.

On the other hand, SWP allows investors to withdraw a fixed or variable amount from their mutual fund investment at regular intervals. This strategy is particularly useful for generating a regular income stream from their investments, making it ideal for retirees or individuals looking for periodic income from their investments.

For retirees, SWP is generally more suitable, as it provides a regular income stream to meet their living expenses. Conversely, SIP is more appropriate for individuals who are still accumulating wealth and don't require regular withdrawals.

By understanding the differences between SIP and SWP, investors can make informed decisions about which strategy best aligns with their financial goals and investment objectives."