Many investors have the wrong impression that SIP (Systematic Investment Plan) and SWP (Systematic Withdrawal Plan) are the same thing when, in fact, they are used for completely different purposes. Although both are related to mutual funds, SIP is for accumulation of wealth whereas SWP is for receiving income at regular intervals.
SIP helps the investor to invest a certain amount of money in mutual funds at regular intervals, it encourages disciplined investing and takes advantage of the rupee cost averaging technique. This strategy is useful in an average market and is recommended for retirement planning.
Conversely, SWP enables the investor to withdraw funds from the mutual fund at regular intervals. This makes it particularly suitable for retirees or anyone who requires a steady stream of income. Payers can also determine the frequency and the amount of payments to be made or received which makes it a flexible financial tool.
“SIP and SWP are two sides of the same coin but serve different objectives. SIP is a way to invest systematically, whereas SWP is a method of structured withdrawal,” said Anand K. Rathi, Co-Founder of MIRA Money.
The main difference between SIP and SWP is the direction of cash flows. SIP is the process of investing money in mutual funds at regular intervals and is known to reduce the risks of market timing while SWP is the process of withdrawing money, which may result in depletion of the principal if withdrawals are more than the returns.
“Investing through SIPs during the working years and then switching to SWPs at the time of retirement is a good approach,” said Swapnil Aggarwal, Director of VSRK Capital.
SIPs and SWPs are used for different financial goals. SIPs are most suitable for those who want to receive regular incomes in the future, while SWPs are convenient for those who require a steady stream of income. It is possible to benefit from both approaches and, thus, improve the overall financial management.
