There is no doubt that investing is one of the best ways to become financially free but this dream can only be possible when you choose the right investment plan.
However, choosing the right investment plan is not easy especially when you have too many options available in the market which creates confusion in the minds of new investors.
Out of various questions, one of the most common questions that most new investors have is whether they should SIP or SWP and which one is better than others.
If you are also one of them then this post is a game changer for you – this post will cover everything from explaining the meaning of both terms to their benefits, pros and cons, and other thing you need to know to be informed decision.
So what are you waiting for? Let’s get on the ride together and understand things in detail.
What are the differences between SIP and SWP?
There are various differences between the SIP and SWP that you need to understand as a new investor especially those who are struggling to decide between both of the plans.
But to give you a simple context SIP is for people who want to build wealth over time on the other hand SWP is for people who want to generate a regular income from their existing investments.
Knowing the above differences is not enough here is the list of the major differences that you can consider and get a clear idea about both plans
| Criteria | SIP (systematic Investment plan) | SWP (systematic withdrawal plan |
| Purpose | To invest regularly to build wealth over time. | To withdraw money regularly to generate regular income. |
| Benefits | Encourage regular investment, rupee cost averaging, and long-term growth. | Provides you the consistent cash flows for your living expenses and other needs. |
| Starting Point | You can start SIP with a low investment of Rs 500 | You can only through from your existing investment to withdraw. |
| Time Frame | It is best for long-term investment like 5 to 10 years if you want to get good returns. | It is mostly suited for those who have short-income needs. |
| Flexibility | Offers flexibility in terms of the investment amount, frequency of payments, and Fund selection. | Allows the investor to choose the withdrawal amount and frequency. |
| Goals | Accumulating wealth over time. | Proving regular income along with preserving capital. |
From the above table you got the clarity about the differences between both of the plans now let’s move ahead and understand each of the plans separately and get into the nitty-gritty of it.
What is SIP and its benefits?
In simple words, SIP stands for a systematic investment plan that allows an investor to invest money regularly in a mutual fund and get a return on their investment over time.
Moreover, this systematic investment plan has also recently gained popularity due to its low entry barrier and flexibility meaning – you can start the SIP with the minimum investment and choose the frequency as per your compatibility (Weekly, Monthly, or quarterly).
Here is some of a list of the benefits of the SIP (systematic investment plan) are
Low entry barrier: As said before, starting a SIP does not require a huge investment you can start with a low investment build an investment habit, and become financially independent over time.
No need to time the market: With the SIP plan you don’t need to spend hours to time the market and wait for the perfect situation to invest as you do with the Lumpsump.
Because in SIP you invest your money regularly and your investment spread over time ultimately reduces your risk in bad market conditions.
Rupee Cost Averaging: When you invest the same amount of money regularly you buy the more you need when the prices are low and less unit when the prices are high and overall these lower your average cost unit of buying.
What is SWP and its benefits?
As the name suggests systematic withdrawal plan refers to a plan that allows an investor to withdraw a certain sum of money regularly from their existing investment.
Additionally, this plan gives you the flexibility to choose how often you want to withdraw your money (Monthly, Quarterly, yearly) along with the amount you want to withdraw.
Overall this systematic withdrawal plan is for the people who have the existing investment and want to generate some regular income to meet their living expenses.
Here are some of the benefits of the Systematic Withdrawal Plan that you can consider are
Source of Income: This plan will help you to generate a regular source of income without depleting your investment entirely which is a good way to supplement your primary income and meet your expenses.
Flexibility: Unlike SIP this plan also gives you the flexibility that allows you to choose the amount you want to withdraw and the frequency of withdrawing it (Monthly, Half Yearly, Yearly).
Control Over Investment: Just like any other fixed deposit plan Or pension plan your money stays invested in the mutual fund which means that it can still grow while you are withdrawing.
Alternative to Pension: It can also be considered a good alternative to the pension as it allows you to withdraw a regular income, and it can be reliable if you plan properly.
Till now you have a clear idea of the meaning and structure of SIP and SWP now let’s move further and discuss the pros and cons of each plan to get more deeper understanding.
Pros and Cons of SIP (Systematic Investment Plan)
Before you decide to invest your hard-earned money in the SIP you need to understand the pros and cons of the SIP to get the most out of it
Pros of SIP (Systematic Investment Plan)
- Help you build the investing habit as you will invest regularly
- Affordable and easy to start as low as 500.
- Flexible to adjust, stop, pause, or increase your amount of investment.
- Convenient with automatic monthly investment.
Cons of SIP (Systematic Investment Plan)
- SIP requires a long-term commitment to see a good return on your investment.
- It is not for the people who are looking for shorter gains or instant returns.
- Need careful fund selection to avoid poor performance.
- It is less liquidated compared to a savings account as it takes time to withdraw.
- Market risk and affect your return on investment (you can avoid this with the right selection of plan).
Pros and Cons of SWP (Systematic Withdrawal Plan)
There is no doubt that a systematic withdrawal plan is a good way to generate a regular income but before you make up your mind to invest your money it’s important to get into the pros and cons of SWP.
Pros of SWP (Systematic Withdrawal Plan)
- Helps you to generate a regular source of income which is useful for retirees.
- Offers you the flexibility to decide the amount you want to withdraw from your fund.
- SWP can help you to manage market risk by regularly withdrawing your funds.
- Allows you to withdraw income without depleting your entire investment.
Cons of SWP (Systematic Withdrawal Plan)
- Drawing too much money can risk the depletion of your investment.
- SWP is designed for income not for growth as compared to SIP.
- If the withdrawal rate is higher than the return it can lead to a reduction in the overall investment value.
What factors to consider to choose between SIP and SWP?
Until now, you got the clear idea that SIP and SWP are two different sides of the same coin but still the biggest question: which is better for you?
To avoid this confusion, here we have listed down some of the key factors that you can consider to choosing between SIP and SWP – ensure to consider before making any investment decision.
Financial Goals
Before deciding which plan to choose, you should first be clear about your financial goals, for example – if your goals are to grow your investment and get a good return SIP can be a good choice for you.
Whereas, if you are looking to generate some regular income, especially at the age of retirement it’s better to go with SWP as it will help you maintain your lifestyle.
Time Horizon
Time is one of the crucial things that one needs to consider at the time of making any investment decision, for the long-term investment horizon SIP would be perfect that gives you maximum return.
On the other hand, SWP is best for people who are always in need of money and looking for ways to generate short-term income.
Risk Tolerance
Your risk appetite is also a key factor in making an informed investment decision if you have a higher risk appetite you can go with the sip as there is some market volatility in exchange for the long-term potential gains.
Conversely, SWP is suitable for individuals who have lower risk tolerance as it provides you the control of regular withdrawal without depleting your overall investment.
Stage of Life
I know it may be sound a bit weird but – yes stage of life has a huge influence on your investment decision for example – if you are a younger investor who has recently started his investing journey then it better for you to choose SIP and focus on long-term investment.
In contrast, if you are between the age of 35 + it’s better to plan for your retirement and choose the SWP as it gives you the safety net of regular income along with preserving your capital.
These are the list of the above factors an individual needs to consider to make an informed decision of choosing between SIP and SWP.
Conclusion: SIP vs SWP which is one is better
Choosing between SIP vs SWP is not about knowing all the differences but it’s about knowing which option is better as per your current situation and financial goals.
SIP is for the people who can invest regularly over time to get the potential return on their investment and you can start this without a major investment.
SWP Is for the individual who wants to generate a regular income from their existing investment while preserving the capital mostly for the people who need constant cash flow.
Lastly, your decision must align with your current situation of whether you want to build a wealth over a time or get a steady income on a regular.