S.I.P. vs S.W.P. - Compare Systematic Investment and Withdrawal Plans

You were wrapping your head around the concept of S.I.P.s and now you just came across the word S.W.P. in some brochure or online forum. 

But, what even is an S.W.P.? Is it just another form of an S.I.P.? Is it related to Mutual Funds like S.I.P.s? What are its features and how does it compare to an S.I.P.? Read on to find out the answers to all these questions and even more.

Systematic Investment Plan (S.I.P.)

By Definition, an S.I.P is a method of investing your money wherein investments are made in a predetermined amount at predetermined intervals. Hence, it has been given the name “Systematic” Investment Plan. 

How S.I.P. Works

As mentioned earlier, S.I.P. in itself is just a method of investing your money and can be used to invest in almost all sorts of securities and investment schemes. But, in today’s market, it has become virtually synonymous with Mutual Fund Investments. Hence, we will be talking about S.I.P.s in the context of Mutual Funds in this article.

Now, when you decide to invest in a Mutual Fund and choose which one is the right Mutual Fund for you, you set how much money you would be investing in the said fund and at what intervals. If you want to know how to start your S.I.P. in Mutual Funds and choose the Mutual Fund that is right for you, read “How To Start an S.I.P. in Mutual Funds”. While setting up your Mutual Fund Investment, you provide your bank details and the predetermined amount is automatically debited from your bank account and invested in the scheme.

A Mutual Fund is divided into units with their Net Asset Value (N.A.V.) at a particular time. This N.A.V. depends on how good or bad the fund is performing. When you invest your money in a fund, the number of units corresponding to that amount is allocated to you. For instance, if the NAV of a Mutual Fund Unit is ₹10 and you decide to invest ₹500 in the said Mutual Fund, you will be allotted 50 units. When your fund performs well, you make two types of gains. The first gain is the dividend you earn from all the stocks of companies and interest from the debt securities your fund had invested in. The second gain is the value appreciation of your Mutual Fund Unit’s N.A.V. as the N.A.V. increases and decreases depending on your fund’s performance as discussed above. It can be understood that these gains are earned on every unit, that is, the higher the number of units a person holds, the higher the amount of gains they make on the fund’s performance. So, as you keep investing little by little over time, more and more units are allotted to you, and through compounding, by the time your fund ends, you end up accumulating a huge amount.

Key Features of an S.I.P.

• Diversification: Mutual Funds collect a large pool of funds that is used to invest in a variety of securities. It invests in equities to earn considerable returns on investments while investing in debt securities such as debentures and bonds to earn a fixed income minimising the risk of the fund’s portfolio. Further, the equities that are invested in are selected in such a way that in case some equities underperform, others perform well enough to cover for them. Hence, Mutual Fund S.I.P.s offer higher returns at a lower risk.

• Small Investment: Since Mutual Funds are vehicles of collective investments, they allow retail investors to invest their money in amounts so small that wouldn't have been possible otherwise. That is the reason you see people investing as low as ₹100 in Mutual Fund Schemes and earning considerable gains on it, a feat which would not have been possible otherwise.

• Comfort: Unlike individual investments, when you invest in a mutual fund, you just have to research which one suits you best depending on the objectives, performance and risk profile of the fund only. The actual research about stocks, market performance, business cycles and a lot of other factors is done by the fund managers who are responsible for the performance of the fund. On top of that, you do not have to manually invest your money every week/month/quarter/year, rather the money is automatically invested on your behalf, deducted directly from your bank account on the date pre-determined by you while starting the S.I.P.

• Compounding: We have already discussed the working of Mutual  Fund S.I.P.s.How your invested corpus keeps growing over time as you invest more money. Further, part of your returns are also re-invested into the same scheme. This creates a compounding effect leading to much bigger gains than would have been possible otherwise.

• No Commitment: Unlike recurring deposits, you have the option to stop your S.I.P. any time you want. You can sell off any units you hold and enjoy the capital gains you have earned on your portfolio. You can also pause your S.I.P. if unforeseen circumstances hit and resume where you left off. 

• Tax Benefits: Investing in a specific type of Mutual Fund S.I.P.s called Equity Linked Saving Schemes (E.L.S.S.) can reap tax benefits under Section 80C of the Indian Tax Act, 1961. To know more, you may visit “S.I.P. Tax Benefits Under Section 80C”.

Systematic Withdrawal Plan (S.W.P.)

By Definition, an S.W.P. is a method of withdrawing a predetermined amount of money at predetermined intervals from a large lump sum amount of money previously invested. Hence, it has been given the name “Systematic” Investment Plan. 

How S.W.P. Works

Let us suppose you have received a large sum of money and you don’t know what to do with it. If you keep it ideal, you know that its value is going to depreciate over time due to inflation. You can grow it by keeping it in a fixed deposit, but that would render you unable to use it for your needs. This is where an S.W.P. comes in. It allows you to invest a lump sum amount in an investment scheme, growing it through the capital market while drawing a predetermined amount of money at predetermined intervals.

Much like an S.I.P., S.W.P.s also utilise Mutual Funds to grow the fund corpus and minimise the risk through diversification. A large amount of money is invested in a Mutual Fund Scheme all at once, and it grows through returns earned on the portfolio’s diversified securities. At the same time, as the fund grows, a predetermined amount from the corpus is given to you at your specified interval. If done correctly, it can even lead to a perpetuity wherein you, and after you, your generations can enjoy a regular stream of income from the fund. 

Key Features of an S.P.W

• Regular Stream Of Income: S.P.W. provides you with a regular stream of money from the fund corpus invested by you and grown through the earnings on the portfolio in which you have invested your money. This further leads to financial stability and better utilisation of your money, which would otherwise have lost its value due to inflation.

• A Decent Pension Plan: Savings from the money you have earned over your career can be invested in S.W.P. Schemes and the regular stream of income from it can be used as a pension, ensuring a tension-free life of retirement.

• Perpetuity: Due to investment in a Mutual Fund Scheme, your fund corpus grows yearly by a certain percentage. If you draw an amount of money by a percentage smaller than what the fund corpus grows by, your fund corpus will never extinguish. Simply put, your fund can keep providing a steady income for you and your generations.

• Capital Preservation: As explained earlier, investing your money in S.W.P.s leads to better utilisation of your funds and it saves your money from getting its value depreciated due to inflation.

• Tax Benefits: No tax deducted at source (TDS) is supposed to be paid on the funds received as regular income from the S.W.P.

Comparison Of S.I.P And S.W.P

It can be said that S.I.P.s and S.W.P.s are the exact opposites of each other. While S.I.P.s are used to keep investing small amounts of money over time which fetches a huge amount of money at the end of the investment mandate, in S.W.P.s you first invest a huge amount of money from which small amounts of money are drawn by you as regular income over time. 

Of course, there are similarities too. Both S.I.P. and S.W.P. involve investing in a Portfolio of various securities across the capital market to grow the fund corpus and earn capital gains and both can reap tax benefits to the investor as well.

Here is a table to summarise it

Conclusion

In conclusion, both S.I.P.s and S.W.P.s are instruments of investments you can use to earn considerable returns over time and live a financially stable life. There is no question of one being better than the other, it is just that they are suitable for investors who have different goals.

Frequently Asked Questions

Ques 1. Is an S.W.P. better than an F.D.?

Ans. Although, the answer can be subjective, from an investor’s point of view an S.W.P. can be better than an F.D. since it offers a higher return due to investment in various capital market securities including equities while minimising risk at the same time through diversification. Further, a Fixed Deposit requires you to lock your fund rendering the money unusable to you. An S.W.P. on the other hand provides you a regular stream of income you can use.

Ques 2. Who is an S.W.P. ideal for?

Ans. Systematic Withdrawal Plans are ideal for people who have a large sum of money to invest as a lump sum amount. A person may have received a hefty sum of money as a pension, as winnings from the lottery, as winnings in a competition, as inheritance or from whatever source. If they intend to save their money from losing value due to inflation while drawing a regular amount to use at pre-determined intervals, an S.W.P. is ideal for them.

Ques 3. Can I change these pre-determined amounts of money as per my requirements?

Ans. Yes. Both S.I.P.s and S.W.P.s provide flexibility to investors. They may set any amount of money at any interval of time for both investing in an S.I.P. and drawing from an S.W.P. and these pre-determined factors can be changed as and when required.

Ques 4. Which is better? An S.I.P. or an S.W.P.?

Ans. As far as risks and returns are concerned, neither of the two can be termed better than the other. In fact, it is possible that an S.I.P. and an S.W.P. may be earning the same returns at the same time at the same risk profile. (One Mutual Funds Investment Scheme can run both S.I.P. and S.W.P. through its fund at the same time). Other than that, as we have mentioned below, S.I.P.s and S.W.P.s cater to investors with different situations and goals, and hence, neither of them is objectively better.