Difference Between SIP vs SWP in Mutual Funds

The rise in mutual fund investments has made investors curious about related terms. SIP and SWP are the most commonly searched terms. SIPs allow investors to invest a fixed sum of money into mutual fund schemes, whereas SWPs enable investors to withdraw a fixed sum of money regularly from their investments.

Understanding the difference between SWP and SIP is essential for investors who want to improve their financial strategies. In this article, we’ll explore the differences between SWP and SIP. Exploring these concepts will help you make informed decisions about your financial goals.

SIP stands for Systematic Investment Plan, a well-disciplined method of investing in which an individual can invest a fixed amount in a preferred mutual fund scheme at short intervals. These intervals can be monthly, fortnightly, quarterly, or other.

SIPs are considered a goal-based investment approach for equity mutual funds. They provide excellent opportunities for people to invest in equity markets, with just a small amount of Rs. 500.

How Does SIP Work?

In SIP, an investor invests an amount at a particular time, irrespective of the market conditions. Here’s how SIP works:

• Choose a mutual fund scheme and decide the investment amount and frequency.
• The selected amount is automatically debited from your bank and invested at fixed intervals.
• Units are bought at the current NAV; you get more units when the NAV is low and fewer when it's high.
• Regular investments help your holdings grow over time through compounding.
• Rupee Cost Averaging allows you to buy more units at lower prices and fewer at higher prices.

SWP stands for Systematic Withdrawal Plan (SWP), the opposite of an SIP. In this strategy, individuals can redeem their fixed amounts from mutual fund schemes. For SWP, the investor initially purchases some units of a mutual fund scheme, which is at low risk and mainly consists of liquid funds.

They regularly instruct people to redeem a fixed amount from these schemes. Depending on the instructions, this can be done weekly, monthly, or quarterly.

How Does SWP Work?

In SWP, the investor invests a large corpus in a mutual fund scheme. Later, the fund house is instructed to redeem an amount from that particular fund regularly. Here’s how it works:

• Invest a lump sum in a mutual fund scheme.
• Decide on the funds and the fixed amount to withdraw regularly.
• Units worth the withdrawal amount are sold at the current NAV.
• Each withdrawal reduces your total mutual fund units.
• The number of units sold varies with the NAV at each withdrawal time.

• Taxes on SIP investments are applicable only when investments are redeemed. Investors can claim tax deductions on their SIP investments. If you invest in Equity Linked Savings Schemes funds, you can claim a tax deduction of up to Rs. 1.50 lakhs per annum u/s 80(C).
• Meanwhile, SWPs are strictly withdrawals and, therefore, attract taxes. While there is no tax deducted at Source (TDS) on SWPs, a capital gains tax is applicable based on the scheme type and the holding period of the funds. SWPs are for regular income generation.
• The gains withdrawn for equity funds in less than a year attract a 20% short-term capital gains tax. If Mutual Fund units are sold after a year, gains exceeding Rs. 1 Lakh are taxed at 12.5%. Long- and short-term gains are taxed per your applicable income tax slab for debt funds.

1. Tips to Choose the Right SIP

Starting a SIP is the best investment decision, as it promotes discipline and regularity in investment, but it also requires proper planning. Below are the key tips that will help you through your investment journey:

• Ensure you have a clear financial plan and defined investment goals.
• Choose the right type of mutual fund that aligns with your financial objectives.
• To evaluate the fund's consistency and potential returns, look at its historical performance over the past 5 to 10 years.
• Select a reputable fund house with a strong track record.
• Consider the fund's expense ratio. Lower expense ratios tend to perform better over time by minimizing costs.

2. Tips to Choose the Right SWP

While opting for SWP, keep your larger financial goals and tax implications in mind. Here are a few tips to help you out:

• Determine the frequency of withdrawals, whether monthly or quarterly.
• Opt for larger investments in SWP, which allows for more frequent withdrawals.
• Be mindful of the tax implications associated with SWP. Capital gains tax applies based on the type of fund and the gains you make.
• Monitor market conditions, as declining markets can reduce your principal with frequent withdrawals.

In conclusion, understanding the differences between SWPS and SIPS benefits investors. Both methods help in rupee cost averaging and compounding by avoiding the pitfalls of market timing. However, SIPs and SWPs have different objectives and purposes, making them suitable for different investors.

Disclaimer: The information provided on this website is for general informational purposes only and should not be construed as financial, investment, or legal advice. While we strive to provide accurate and up-to-date content, we do not guarantee the completeness, reliability, or suitability of the information for your specific needs.

We do not promote or endorse any financial product or service mentioned in these articles. Readers are advised to conduct their own research, consult with financial experts, and make informed decisions based on their unique financial circumstances. Any reliance you place on the information provided here is strictly at your own risk.