If you are a young investor considering mutual funds or someone looking to add MFs to your portfolio, a systematic investment plan i.e. SIP may be the most practical step towards making a move in this direction.
Further, if you’re looking for regular fixed amounts from your mutual funds, a systematic withdrawal plan (SWP) can generate steady income while keeping your remaining corpus invested.
Here’s an explainer on SIPs and SWPs, how they differ from each other, the benefits, considerations and other details.
What is a Systematic Investment Plan? How do SIPs work?
An SIP allows investors to deduct a fixed sum into your preferred MF scheme each month directly from your bank account and spread out your investment over time. The monthly interval also helps build financial discipline for the long run.
Investing through an SIP means that your purchase units of the MF each time you invest in a fund. The number of units are equivalent to the amount invested. For e.g. for each unit costing ₹10, and investment of ₹500 each months gets you 50 units. This means that the price can fluctuate as per market performance and your units cost most or less during troughs and peaks.
However, the spreading out of your investment over months, more often than not averages your cost of purchase toward the lower side, despite market volatility. This means that you end up paying less on average per unit, when compared to lumpsum investment.
For an SIP, you will have to instruct your bank to allow regular debit towards the selected schemes either monthly or fortnightly; and the number of SIPs (12 or 6 deductions) you choose.
What are the advantages of an SIP?
- Easy and convenient: It’s much more practical for most regular investors to set aside a monthly amount for investment rather than invest a full pot at once. This can range from ₹100 to ₹1,000 or even more, depending on your comfort. In any case, ₹1,000 once a month for 12 months is more achievable than ₹12,000 lumpsum in a single month. Further, the auto-debit option frees you from the burden of remembering to make regular investments.
- Rupee cost averaging: When you buy MF units at different price points, you make the most of rupee cost averaging, which raises the chances of your profitability.
- Financial discipline: SIPs also help you inculcate financial discipline in your investing habits. Edelweiss MF’s Radhika Gupta advises genz to view this a hack to ensure all savings possible. “Oh… tax is deducted at source! Why not do the same with your savings? That’s SDS — Savings Deducted at Source. Automate your SIPs, RDs or FDs before you even see the money,” she suggests.
What is a Systematic Withdrawal Plan? How does SWP work?
SWP is a feature for MF investors, which allows them to withdraw fixed amounts at regular intervals, while still keeping the corpus invested. It is a popular method of monthly or quarterly “encashment” for retired individuals or for supplemental cash flow, as per a Clear Tax report.
Notably, to avail SWP, you need to first invest — either via SIP or lumpsum, in a fund. Most choose SIP route to build a sizeable sum over a period of time. Once the fund is in place, you can set a fixed withdrawal amount for each month, quarter or year, depending on your requirement. This sum can be updated and changed as per later needs as well.
For e.g. is your withdrawal sum is ₹10,000 per month, and if the NAV on the particular date is ₹20, a total of 500 units will be sold from your MF portfolio to provide the requested amount. The units sold will fluctuate depending on the NAV.
What are the benefits of SWP?
- It provides a stable and steady stream of income from your investments, while allowing you to manage your expenses without impacting the entire corpus.
- It allows flexibility in how much you withdraw and how much you choose to keep invested, facilitating financial discipline even during the withdrawal phase.
- It is tax-efficient compared to interest income from traditional options as it removes the pressure of lumpsum credit into your account.
- It can be paused, modified, or stopped at any time, depending on your requirements.
SIP vs SWP: Key highlights
| Feature | SIP (Systematic Investment Plan) | SWP (Systematic Withdrawal Plan) |
|---|---|---|
| Purpose | To accumulate wealth by investing regularly | To withdraw money at regular intervals |
| Cash Flow Direction | Money goes from the bank to the mutual fund | Money comes from a mutual fund to a bank |
| Suitable For | Early-stage investors, salaried individuals | Retirees, income seekers, and phased withdrawals |
| Investment Style | Monthly, quarterly, or custom instalments | Monthly, quarterly, or custom withdrawals |
| Corpus Requirement | No significant capital needed; starts with small amounts | Requires a built-up fund (via SIP or lump sum) |
| Main Goal | Long-term capital growth | Regular income from existing investments |
| Risk Exposure | Market risk during the accumulation phase | Market risk during the withdrawal phase |
| Time Horizon | Long-term (5-10 years or more) | Medium to long-term, based on corpus size |
| NAV Impact | Units bought as per NAV on the SIP date | Units sold based on NAV on the withdrawal date |
| Returns | Focuses on growth through market appreciation | Focuses on stability and controlled drawdown |
| Flexibility | Can increase/decrease the SIP amount anytime | Can modify, pause, or stop withdrawals anytime |
| Market Timing Advantage | Benefits of rupee cost averaging | Avoids emotional decisions during market volatility |
| Income Generation | No income until redemption | Regular income starts as soon as SWP is active |
| Entry Point | Anytime with a minimal amount (as low as ₹500) | Requires prior investment or a lump sum |
| Common Use Cases | Wealth creation, goal-based investing | Retirement income, EMI support, phased goals |
| Liquidity | Highly liquid; funds can be stopped or redeemed | Liquidity is available, but withdrawal affects the corpus |
| Investor Control | Complete control over when and how much to invest | Complete control over amount, frequency, and pause/start |
| Source: Clear Tax | ||
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
- SIPs promote disciplined investing by allowing fixed monthly investments, which can average out costs over time.
- SWPs provide a way for investors to withdraw regular income while keeping their investments intact.
- Understanding the mechanics of SIPs and SWPs can empower investors to make informed decisions based on their financial goals.