SIP vs SWP – What's the Difference?

Mutual fund investments are one of the most popular forms of investment avenues available to the audience in India. With funds, one can invest through various systematic strategies like SIP, STP, SWP etc., apart from lump-sum investment. The article below focuses on the difference between SIP and SWP in various funds.

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SIP Benefits
Start SIP with as low as ₹1000
Start SIP with as low as ₹1000
No hidden charges
No hidden charges
Save upto ₹46,800 in Tax
Save upto ₹46,800 in Taxunder section 80 C
Zero LTCG Tax
Zero LTCG Tax^ (Unlike 10% in Mutual Funds)
Disciplined & worry-free investing
Disciplined & worry-free investing

Systematic Investment Plan (SIP)

SIP is a disciplined investment method wherein an individual invests a fixed amount in the preferred mutual fund scheme at regular intervals. These intervals can be in the form of monthly, fortnightly, quarterly or any other available frequency type. SIPs are usually mentioned in the context of equity mutual funds and are thus considered a goal-based investment approach. It provides an excellent opportunity for individuals to invest in equity markets even with a small amount of Rs. 500 (or even Rs. 100 in some cases). It is suggested to explore best SIP plans list before taking investment decision.

Systematic Withdrawal Plan (SWP)

A systematic Withdrawal Plan or SWP works oppositely to that of a SIP. In the SWP strategy, individuals are allowed to redeem fixed amounts from mutual fund schemes. For the SWP strategy, the investor first purchases some units of a mutual fund scheme which usually has a low risk (mostly liquid funds). They then give instructions to redeem a fixed amount from these schemes at regular intervals. SWP can be done weekly, monthly, or quarterly as per the instructions. This method is usually preferred by retirees who need a steady income.

Difference between SIP and SWP

The terms Systematic Investment Plan (SIP), Systematic Transfer Plan (STP), and Systematic Withdrawal Plan (SWP) may confuse investors if they aren't aware of these concepts or the difference between SIP and SWP or STP.

Investing in a mutual fund has proven to be one of the best methods to build a financial corpus. However, if you wish to take a systematic strategic approach, rather than putting lump-sum amounts, it is essential to know the major points of differences between SIP and SWP. Let us look into the detailed comparative study of SIP vs SWP

Benefits:

SIP investment is a method that builds disciplined investment habits. It helps spread your funds over a period of time to beat market volatility and, at the same time, provides rupee-cost averaging on your investments. It is considered one of the best wealth accumulation methods.

SWP provides the investor with a scope of regular income. The invested money can be redeemed at regular intervals, thus aiding with day-to-day financial needs. It also provides flexibility in terms of amounts to redeem and stop instructions to the investor.

Suitability:

SIP investments are suitable for investors who wish to save and invest regularly. For long-term wealth accumulation, this strategy suits bests. Also, for individuals who find it hard to invest a large chunk of the amount at one point, SIP can help with small investment amounts.

SWPs are more appropriate for individuals who are looking for a steady flow of income. It is typically preferred by senior citizens or retirees. However, it can also aid individuals with payment obligations such as paying monthly EMIs, paying for children's school/college fees, and other fixed expenses.

How it works:

The working of SIP is straightforward. An investor invests a particular amount at a particular interval, irrespective of market conditions. With the SIP strategy, you buy more units when the market is at a low and a higher number of units when the market is at a high. 

In order to calculate the benefit amount, SIP calculator is a useful online tool.

In SWP, the investor invests a large corpus in a mutual fund scheme initially. Later, he instructs the fund house to redeem a certain amount from the particular fund on a regular interval.

Tax implication:

SIP is a way of investment, unlike SWP, which is a way of withdrawal. So, tax on SIP is applicable (if any) when they are redeemed. Additionally, in the case of investments through SIP in ELSS, individuals can claim tax deductions under section 80C up to INR 1,50,000 per year.

In SWP, if the fund is a debt-oriented fund from which redemption is made, debt fund taxation rules will apply (holding of greater or lesser than 3 years). If the fund is equity-oriented, equity fund taxation will imply (holding of greater or lesser than 1 year).

SIP vs SWP:

SIP SWP
What Regular investments in mutual fund schemes Regular withdrawals from mutual fund schemes
Why Wealth accumulation A steady stream of income
Who Ideal for investors of all ages, especially young investors Ideal for retirees and senior citizens
How Money gets debited from your bank account to buy mutual fund units Mutual fund house sells your invested units to credit the money in your bank account

Conclusion:

Over the years, the mutual fund industry has evolved and incorporated changing customer needs and market dynamics. The advantages of fund investments are enormous, and so are the options available. An investor can opt for either SIP or SWP depending upon their goals and future requirements.

+For Mutual Fund midcap category Returns https://www.morningstar.in/tools/mutual-fund-category-performance.aspx & for Insurance midcap fund category Returns- https://www.morningstar.in/tools/insurance-fund-category-performance.aspx
*Past 10 Year annualised returns as on 01-12-2023
*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
~Source - Google Review Rating available on:- http://bit.ly/3J20bXZ
^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

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