InvestorQ : What will be the impact on SIP if we withdraw money every year?
vani Patil made post

What will be the impact on SIP if we withdraw money every year?

2 years ago
SIP works as a method of investment primarily because of 2 reasons- rupee price averaging and compounding. 
If you withdraw profit annually, you can’t reap the benefit of compounding on your overall corpus.  You will earn only on the amount you invested rather than on your capital and profits thereby earned. This will disturb your compounding process, and drastically reduce the potential corpus you could earn overtime.  

In addition to that, you will be liable to pay a higher tax on the units redeemed and there could also be a penalty in the form of an exit load for some funds. 

Let us understand this with an example:
Suppose you invested Rs5,000 in a year in a mutual fund via SIP. You earned a profit of 10% on this sum. At the end of the year, your corpus created was equal to Rs5,500. This amount if undisturbed gets reinvested the next year. Another SIP of Rs 5,000 got added to the investment amount for the next year. The total invested amount now is equal to Rs 10,500. The corpus created at the end of the year with an expected 10% rate will be equal to Rs11,550. And this continues, with some fluctuations in expected returns, over the years, if left uninterrupted.