What would you invest in - SIP vs SWP?
If your long-term objective is to build a corpus, investing in one investment tool is not enough. As an investor, you should be aware of the significance of diversification, combining various investment tools, long investment horizons, and so on. Mutual Funds have existed for ages and have proved their worth as an ideal investment vehicle. Here, we compare the two Mutual Fund provisions, SIP vs SWP, to determine which is better.
A Systematic Investment Plan (SIP) is a way of investing in Mutual Funds. Instead of investing a large sum at once, you can invest in smaller instalments at regular intervals. SIPs help you inculcate a sense of disciplined investing and come with compounding and rupee-cost averaging benefits.
A Systematic Withdrawal Fund (SWP) is another way of investing in Mutual Funds. Under this method, you can typically invest lump sums in mutual funds, but you can withdraw a fixed sum regularly at a pre-determined frequency. With each withdrawal, your lumpsum investment in the fund reduces while the remaining funds from the lumpsum continue to remain invested.
Although both SIP and SWP are Mutual Fund vehicles, they have different objectives. While SIP helps you invest, SWP provides regular income. SIP is ideal for beginners looking to kickstart their investment journey. Conversely, SWP is for seasoned investors who have accumulated wealth over the years and now wish to regularly use a portion of the wealth to boost their cash inflow, especially after retirement. Therefore, investors make use of the investing and withdrawal strategy or the twin strategy.
Let us say you invest INR 10,000 every month in SIPs of Equity Funds for 20 years. Assuming the rate of return as 10%, after 20 years, you would have built a corpus of approximately INR 76 Lakhs. You retire after 20 years and opt for SWP, wherein you affix INR 20,000 per month to be withdrawn from your corpus. In one year, you would have withdrawn INR 2.4 Lakh. Then your wealth should have decreased to INR 73.6 Lakh. Thanks to the power of compounding, the corpus amount after a year will increase to almost INR 1 Cr.
The twin strategy works on many levels. It helps you meet your short-term and long-term financial goals, such as paying off loans, funding your children’s higher education, and confronting financial emergencies.
SIP vs SWP investments have different objectives. It is thus difficult to say which is better. SIP helps you invest, while SWP enables you to receive income. However, by integrating the two, you get higher returns while simultaneously receiving regular cash flows. Remember, you can make the most out of SWP investments only if your corpus is large. Nevertheless, you can opt for any investment you prefer to meet your investment goal.
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*Disclaimer: This article is for information only. We recommend you get in touch with your income tax advisor or CA for expert advice.