Deciding Between SIP and SWP Based on Goals

Investing sensibly is crucial for achieving long-term financial goals. With a variety of investment tools available this is easier. Among the different tools available are Systematic Investment Plan and Systematic Withdrawal Plan. While SIPs are designed to help build wealth over time by regularly investing in mutual fund schemes, SWPs focuses on providing a steady flow of income from investments made. In this blog, we’ll explore the benefits and drawbacks of each and at the end of this blog, it will help you to decide which approach might be better suited for your financial objective.

SYSTEMATIC INVESTING PLANNING (SIP)

A Systematic investment plan is an investment tool which allows investors to invest a fixed amount at regular intervals in a mutual fund scheme. It allows an investor to invest a pre-defined amount at pre-defined intervals in a selected scheme. These pre-defined intervals can be weekly, monthly, quarterly, and yearly with a fixed amount of money as low as Rs 500.

Different Types of SIP

• Fixed SIP: In this type of SIP, a fixed amount is invested at regular intervals.
• Flexible SIP: In this type, the investor has an option to change the amount of investment in each installment.
• Perpetual SIP: Type of SIP in which the end date is not specified.
• Trigger SIP: It is a type of SIP where investors can trigger investments at certain points. When the market reaches those trigger points investment is automatically made.
• Top-up SIP: In this type, the investor has the option to increase the amount invested periodically.
• Multiple SIPs: Investors can invest in multiple schemes at the same time using a single SIP mandate.

Advantages of SIP

• Disciplined investing: It encourages regular and disciplined investing as investors are required to make fixed investments at regular intervals.
• Rupee Cost Averaging: It utilises the strategy of Rupee cost averaging as investors can buy more units when prices are down and fewer units when prices are high thereby reducing the overall average cost and mitigating impact of market volatility.
• Power of compounding: Choosing the growth plan ensures returns generated from investments are reinvested to generate additional returns. Over a long term horizon compounding can significantly enhance the growth potential of investments leading to wealth creation.
• Lower initial investment: An investor can start SIP with a very small amount, which can be as low as Rs 500/- month. 

Disadvantages of SIP

• Lack of market timing: With an SIP you don’t have to worry about predicting best time to invest. However if market stays flat for a long time, SIP might not perform well as compared to lump-sum investments made when prices are very low. The main drawback is that it does not work when you have lump sum to invest e.g. investing through SIP over 12 months is most likely to deliver lower returns than making a lump sum investment.
• Exit load and taxes: Some mutual funds charge exit loads if units are redeemed before a specific period and capital gains taxes may also apply. 

SYSTEMATIC WITHDRAWAL PLAN (SWP)

A Systematic withdrawal plan is when you invest your amount in a lump sum and after which you withdraw a fixed amount from a mutual fund scheme regularly. The time of withdrawal can be monthly, quarterly, yearly and the amount can be decided as per your requirements. On a set date units from your portfolio will be deducted and funds will be transferred to your account. 

Advantages of SWP 

• Regular source of Income: In SWP you will get a fixed amount either monthly/quarterly/yearly based upon the time frame you have chosen.
• Suitable in bull market: If your investments are made during a bull run, you can redeem fewer units as the price or NAVs will be high which help you in generating a big corpus at the end of tenure. (Units Sold= Withdrawal Amt/NAV)

Disadvantages of SWP

• Market volatility: As the NAV of the assets depends upon the market, if the market corrects then NAV will fall, resulting in more units being redeemed which means fewer units will be left with an investor, leading to a smaller corpus at the end.
• Depletion of capital: If the amount which you are withdrawing is higher compared to returns generated than if the market corrects itself at that point number of units redeemed will be more. So this will lead to depletion of invested capital sooner than anticipated. 

SIP and SWP

SIP helps you make systematic investments while SWP helps you make systematic withdraw. If an investor is in the beginner stage and looking to invest in a mutual fund with a small amount, SIP is the way to go. And if investors has already accumulated a corpus with an existing Mutual fund and is seeking regular income then SWP is an ideal choice. In fact investors don’t need to choose one over the other. Investors can start SIP today and after 10-15 years once he/she has the corpus then they can opt for the SWP. 

CONCLUSION 

In the end SIP and SWP both offer different sets of benefits to the investors. Both these help investors enjoy the benefit of rupee cost averaging and compounding while avoiding the pitfalls of market timing. However, both SIP and SWP serve different purposes and objectives therefore, while investing, investors should consider their financial goals, investment objectives, and cash flow needs.