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Is SIP better than SWP?
“Mutual Funds Sahi Hai!” is a jingle that has gained widespread popularity among investors in the last few years and has also increased awareness among people for investing. This rising popularity has also created inquisitiveness among investors for all the basic terms such as SIP, SWP, XIRR, etc. SIP and SWP are bound to be the most searched terms.
SIP vs. SWP comparison has always been a buzzword, and thus, in this article, we will go through all the major differences and get the answer to "Is SIP better than SWP?"
Let’s begin with the basics.
What is SIP?
A Systematic Investment Plan (SIP) is an investment approach in which an investor regularly contributes a fixed amount to a mutual fund. The frequency is mostly monthly or quarterly. It is highly recommended for investors who plan to build wealth over time and who don’t possess immense knowledge about the market. SIPs allow investment in smaller amounts, i.e., investors don’t have the burden of lump-sum investments, making it more accessible.
How SIP Works
In SIP, investors have to invest a fixed amount of money on a periodic basis. With consistent market participation, it becomes an effective long-term strategy. Here is the process:
The process begins with investors contributing a fixed sum periodically to mutual fund schemes.
Then the Rupee cost averaging occurs, in which investors buy more units when the market is low and vice versa. It results in the reduction of the average cost.
Then there are compounding benefits where returns on investment generate additional returns, significantly enhancing wealth accumulation over time.
What is SWP?
It is the just opposite of the functioning of SIP. A Systematic Withdrawal Plan (SWP) allows investors to withdraw a certain amount from their mutual fund investments at regular intervals. It is built for those investors who have built enough fortune through investments and now want to convert their wealth into a steady income stream. These are generally retirees who want to receive regular payments.
How SWP Works?
There is a withdrawal process in SWP in which investors can redeem a fixed amount from the mutual fund investments at periodic intervals. The fund house sells a certain number of units to meet the withdrawal amount and provide investors with a steady income flow.
Investors can manage capital gains more effectively by withdrawing from earnings instead of the initial investment.
It is ideal for a steady flow of income for people like retirees who can initially contribute a huge sum to get a steady income for the rest of their lives.
Difference Between SIP and SWP:
Aspect | SIP | SWP |
Purpose | Periodic and Regular Investments in Mutual Funds | Periodic and Regular withdrawal from Mutual Funds |
Goal | Growth of Wealth | Steady flow of income |
Suitability | Long-term investors seeking growth | Needing Steady Income (like retired professionals) |
Cash Flow Movement | Money gets debited to buy units. | Units are sold to credit money in investors’ accounts. |
Taxation | Taxed Upon Redemption, Eligible for Tax Deduction in certain funds | Taxed based on the holding period and fund type |
Flexibility | Contributions can be started, stopped, or modified. | Withdrawal amount and frequency can be adjusted. |
SIP or SWP: Which is best?
Now you must have understood that the answer to this question lies in your requirements. If you want to grow your wealth over a long period, then undoubtedly go for SIP. However, if your requirement is to get a steady income through your accumulated wealth while growing it simultaneously, then SWP is a better option.