SIP vs SWP: What is the difference? Know through examples

SIP vs SWP: Investment is necessary but it should be goal-oriented. If the direction of one's investment is clear, they are most likely to achieve their financial goals. Similarly, when you invest in a mutual fund through systematic investment plan (SIP) with a proper investment strategy, there are high chances that you will achieve your financial goal. But what if the stock market at is down at the time of your withdrawal, or, at a time you had set your financial goal for. Your mutual funds will also take a hit.

When the stock market is down, it may take a year or more to recover.

What if you desperately need money at the time the market is down. 

There are chances that your mutual fund returns may shrink and you may fall short of your financial goal.

For example, your mutual fund return investments were giving you returns of 12 per cent for 10 years and you were about to withdraw them in the next two years.

But after 10 years into your investment, the stock market slides and your mutual fund returns for the next years turns negative. 

Amid such a backdrop, systematic investment withdrawal (SWP) can be useful.

A SWP is just the opposite of SIP. While you invest money at regular intervals in a SIP, you withdraw a certain amount at regular intervals in a SWP. Since you withdraw a certain amount at regular intervals, your returns may not take a hit in the long run even if the market goes through ups and downs.

In this write-up, know the difference between SIP and SWP through examples.

What is a SIP?

In SIP investment, you invest a certain amount every interval that may be daily, weekly, monthly, quarterly, or half-yearly.

When you invest in a SIP, you purchase net asset value (NAV) of a mutual fund.

The NAV rates fluctuate daily, so you purchase NAVs in different proportions in different investment cycles.

This method is in contrast to lump sum investment where you purchase NAVs at the same rate in one go through one-time investment. 

Benefits of SIP investment

It helps in rupee cost averaging.

You purchase less NAVs when the market is up and more when the market is down.

When you do it in the long term, you don't have to time market.

Rupee cost averaging helps you trim losses if any.

You can start an SIP with as low amount as Rs 100.

There are many plans where the starting investment is Rs 500.

You can increase your SIP investments as your income increases. 

SIP gives you benefit of compounding.

So, the longer you stay in an investment, the more your money's value increases. E.g. If you invest Rs 10,000 a month in a mutual fund scheme through SIP and gets 12 per cent annual return, you investment in 10 years is Rs 12 lakh and returns will be Rs 23.20 lakh, but if you invest for the next 10 years, your investment will be Rs 24 lakh but the return will be nearly Rs 1 crore.

It is possible because you get compound returns on SIP investments. 

Since SIP investment amount is deducted at every regular interval from your savings, it inculcates the habit of disciplined saving.  

You can choose the tenure of SIP as per your earning cycle. 

What is SWP?

It is also a mutual fund scheme that allows investors to withdraw a fixed amount at regular intervals.

You can choose the amount and frequency of withdrawals as per your convenience.

At a pre-decided date, the fund sells units equivalent to your set amount and transfer money in your account.

You can choose the amount you want to withdrawal as per your requirement.

You can also withdraw just your gains from your mutual fund scheme with keeping your investment as it is.

A SWP is a good scheme for investors who want a certain monthly income from their mutual fund investments. 

Benefits of SWP

In you pick an SWP plan, there is no tax deducted at the source, you just have to pay the capital gains tax, which is 10 per cent if your capital gains in a year are above Rs 1 lakh.

But if your capital gains in a year are less than that, you have to pay tax only as per your tax slab.

Like SIP, SWP also provides the facility of rupee cost averaging.

So, when the market is down, you sell more of your NAVs at the time of withdrawal.

But if the market is up, you sell less NAVs. E.g. if you withdraw Rs 5,000 every month from a mutual fund scheme and the rate of your NAV is Rs 100, you will sell 50 NAVs, but in the next withdrawal cycle, if the rate of NAV drops to Rs 95, you will sell 52.63 units. 

SWP investment also inculcates investment discipline. E.g. when the market is down, the anxious investors withdraw their investment in panic.

As a result, they either suffer loss or earn little profit.

But when, the market recovers and the unit rates go up, they regret their decision.

E.g. If the rate of the NAV of your mutual fund scheme was Rs 100 a month ago and you had 100 units, the value of your investment was Rs 10,000.

But in the next month, the market crashes and your NAV drops to Rs 90, your investment value declines to Rs 9,000.

You sell all your NAVs. In the next month, the market recovers and the NAV reaches Rs 105, you regret as you missed out on an opportunity. But SWP allows you to withdraw only a fixed amount, so even if the market sinks, you don't withdraw your investments in panic.