Over the years, systematic investment plans (SIPs) of mutual funds (MFs) have gained enormous interest among retail investors as a preferred long-term investment option, owing to benefits such as disciplined investing and rupee-cost averaging. While SIPs play a key role in generating a corpus sufficient for financial goals, it is also essential to utilise the corpus effectively during withdrawals. This is where systematic withdrawal plans (SWPs) come into play. In light of this, various fund houses, including HDFC (Dream), Aditya Birla Sun Life (Sampoorna), ICICI Pru (Freedom), and SBI (Mitra), have introduced their combination of SIPs and SWPs. Here’s what you need to know.

How does it work

The fund houses market their combination of SIPs and SWPs as a product that assists individuals in goal planning and execution. There are generally three stages of this facility. 

Firstly, one needs to set up an SIP for a specified time-frame, typically ranging from eight to 30 years. The length of tenure varies among different fund houses. For SIPs, investors are given options of certain schemes, known as source schemes, where they invest a fixed amount (top-up SIP allowed in certain cases) for a specific period.

Upon completion of the SIP tenure, the accumulated corpus is automatically transferred to the target scheme of the same fund house. The options for the target scheme, typically debt-oriented or hybrid schemes, are provided by the fund house.

The SWP begins once the SIP tenure ends, with investors receiving periodic withdrawals, usually on a monthly basis. The withdrawal amount is predetermined when setting up the product. Investors can either choose the withdrawal amount or opt for a multiple of the SIP amount.

For example, if an investor chooses to invest ₹10,000 in ICICI’s Freedom SIP for 10 years and doesn’t specify a withdrawal amount, the fund house provides withdrawals at 1.5 times the SIP amount — ₹15,000 periodically. Similarly, the default multiple for a 12-year SIP tenure is 2x, allowing investors to withdraw ₹20,000 periodically post the SIP tenure if the SWP amount is unspecified. Note the withdrawals continue until all the units are exhausted.

What are the options

ICICI Prudential MF offers Freedom SIP, HDFC MF offer Dream SIP, ABSL MF offers Sampoorna SIP, and SBI offers Mitra SIP. When availing these facilities, investors need to choose from SIP tenure options provided by the fund houses. Unlike regular SIP or SWP, only the monthly frequency is available in these combo facilities for both SIP and withdrawal.

SBI and ICICI Pru provide nearly 30 options to investors in the form of source schemes. In contrast, ABSL and HDFC offer 13 and 7 schemes, respectively. ICICI Pru and HDFC allow investors to select a scheme from a list that serves as both source and target schemes. Source schemes typically include equity-oriented and aggressive hybrid schemes, while target schemes generally include debt funds and conservative hybrid schemes. For target schemes, SBI and ABSL products mainly include debt scheme options, while ICICI Pru and HDFC provide primarily hybrid and equity-related schemes.

Each fund house allows investors to select the SWP amount at their discretion, regardless of the SIP tenure. However, in the case of SBI Mitra, investors cannot choose an SWP amount exceeding the multiple specified (1x for eight years, 1.5x for 10 years, 2x for 12 years and 3x for 15 years) by the fund house for the respective SIP tenures.

If discontinuing the facility, a notice of around 30 working days is required.

Hits and misses

The combination of SIPs and SWPs can help build a sizeable corpus in a disciplined manner and allow systematic withdrawals once goal is reached. These products offer predetermined source and target scheme universes, providing convenience without the need for decision-making.

However, the SIP and SWP combo product has its drawbacks, limiting investor flexibility due to predetermined terms and a restricted choice of investment options.

Investors opting for a particular fund house can only choose source and target schemes from that same fund house, and specific schemes may be limited.

While equity-oriented options are abundant, debt-oriented options may be limited for certain fund houses. Additionally, investors can change the target scheme with a 30-day notice, but other terms, such as the time period, those cannot be altered.

What to do

Consider this combo option for goal planning if you lack financial expertise and prefer the fund house’s assistance in decision-making. If convenience and a predetermined approach align with your priorities, this product may suit your needs.

However, if you value flexibility in choosing schemes, it’s advisable to avoid investing in this product. In such cases, setting up SIPs and SWPs independently at suitable time intervals provides the freedom to choose schemes across different fund houses.