SIP vs SWP - Key Differences and Which is Better

What is SIP?

With a Systematic Investment Plan, you can invest in mutual funds without needing a large lump sum amount. You simply have to select a fixed amount that will be automatically invested at regular intervals. This mode of investment makes investing in mutual funds far more accessible for anyone looking to build wealth steadily over the years.

How Do SIPs Work?

Once you’ve selected your instalment amount, frequency, and date of investment, money gets automatically debited from your linked bank account and then invested into the fund of your choice at the prevailing Net Asset Value on that particular day. This NAV is calculated and updated daily based on the fund’s underlying assets. If the NAV is lower on your SIP date, you’ll buy more units, and if it’s higher, you’ll get fewer. This is called rupee cost averaging, as it averages out the cost of your investment and helps reduce the impact of market fluctuations.

What is SWP?

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SWP stands for Systematic Withdrawal Plan, which, as the name suggests, allows you to withdraw a fixed amount of money from your mutual funds at regular intervals. So while you’d use an SIP to invest regularly, you’d use an SWP to systematically withdraw what you’ve already accumulated. This is the key sip vs swp difference.

How Do SWPs Work?

Let’s say you start an SIP of Rs. 20,000 per month for 10 years at 12% to accumulate approximately Rs. 95 lakh. Once you’ve built this corpus, you can transfer your money to a safer mutual fund and set up an SWP to start withdrawing a fixed amount, say Rs. 30,000 per month, to meet your financial needs. During that time, your corpus will continue to generate returns, just that with every withdrawal, the number of units you hold will decrease, depending on the NAV. In a way, SWPs are like SIPs, but reversed. An sip investment planner might recommend these plans to retired investors, as they are often looking to generate a fixed income every month.

Advantages of SIP and SWP

Before we head into the differences between sip vs swp, let’s check out some benefits of investing in each option:

Advantages of SIP

• You don’t need a large sum to get started with mutual fund investing. Some AMCs even allow individuals to begin with just Rs. 100 per month.

• Regular saving and investing help build financial discipline, which is an essential trait for anyone wanting to build long-term wealth.

• Even the best sip planner will tell you that timing the market correctly all the time is impossible. Thanks to rupee cost averaging, you don’t need to wait for the perfect time to enter the market.

• If you choose growth SIPs, your returns get reinvested back into the fund, thus allowing your investment to compound over time. This helps your corpus grow faster, so the earlier you start, the better.

• Mutual funds are diversified vehicles managed by expert fund managers, so SIPs are a convenient option for those who want to earn market-linked returns without having to manage investments on their own.

• SIPs are flexible. You can increase your contribution as your income grows, decrease it during emergencies, or pause your SIP temporarily if you need to.

Advantages of SWP

• SWPs allow reliable income generation, making them a good option for retired investors.

• While you make your regular withdrawals, your remaining corpus stays invested and grows. This way, you can stretch your funds for a longer period.

• You can easily customise your withdrawal needs (how much to withdraw and how often) depending on your needs.

• Income for SWPs can be more tax-efficient compared to other income-generating vehicles if planned correctly.

Differences Between SIP and SWP

Let’s have a quick look at the differences between sip vs swp:

Which Is Better: SIP or SWP?

Both these options serve different purposes, so the choice between sip vs swp really comes down to where you are in your financial life and what you want your money to do. SIPs are for those individuals who want to invest their savings to achieve financial goals such as buying a home or saving for their children's education. These investors are working and are in the wealth accumulation stage. If you belong to this category and are new to investing, you should consider consulting with a professional before starting SIPs. The best sip planner takes a thorough look at your financial profile, i.e., your income, savings, liabilities, time horizon, and risk tolerance, and recommends mutual fund schemes that align with your goals.

On the other hand, if you have already built a corpus and are looking to generate a reliable monthly income, you can look into SWPs. This can be a better strategy compared to withdrawing your investment all at once, as it allows your money to remain invested and continue to grow. Plus, you gain more flexibility, liquidity, and tax efficiency compared to other income-generating investments such as fixed deposits.