Introduction: –
Dividends are the way in which mutual funds payout the profit to their respective investors. A systematic withdrawal plan (SWP) is a way in which, Investors can pull out their investments. A dividend plan in a mutual fund is one in which the profit from the investment made by the company is distributed to investor in the form of a dividend. Whereas, in the SWP plan, investors first invest money in a low-risk scheme, and then after withdrawing a fixed sum of money from the mutual fund scheme on a regular interval basis. The article provides insight, about the difference between a dividend mutual fund plan and SWP and conclusions.
Dividend Plan of Mutual Fund V/s SWP
Though both schemes provide regular income to the individuals, There are differences between two of these, which are as follows:
1. Returns :-
In a dividend plan, the returns are not fixed. This is because of the mutual fund scheme generate profit by selling the assets that are in their portfolio.
While, in the case of SWP, it is a systematic redemption of money from mutual funds and hence the investor gets a pre-determined amount in this case.
2. Suitability :-
Dividend option is suitable for individuals who are l The dividend option is suitable for individuals who are looking for periodic income though the amount may be fixed or not.
SWP is generally suitable for individuals looking for a fixed income source especially, retirees. It is because retirees can use it as a substitute for a pension.
3. Capital Erosion:-
In SWP, the investors received cash inflows from the redemption of their investment in the scheme in which they invest. So with each passing month, The number of MF units held by investors will go down.
In the case of a dividend plan, there is no capital erosion as the investors enjoy profits. On capital invested in a scheme. Capital erosion takes place when investors sell their entire MF units.
4. Reduction in NAV :-
In the case of a dividend plan, there is a reduction in the NAV value as the profits are not reinvested in the fund.
In the case of SWP, it doesn’t affect the NAV as there is a withdrawal of an amount.
5. Portfolio Size :-
In a dividend plan, portfolio size is unaffected as the investors earn dividends without redeeming the number of units, and hence the portfolio remains unchanged during the entire investment period.
In SWP, investors earn money as they redeem the units, hence the portfolio size is changing, and at the end of the plan, the size of the portfolio will have nil units.
6. Taxes
The SWP plan is better in terms of taxability. Investors attract capital gain tax on redeeming the units. If investors hold for less than 12 months, it will attract 15% tax rate on the returns generated. Returns from debt funds held less than 36 months are added to the investor’s taxable income and taxed as per the slab rate.
In the dividend plan, earlier dividends are tax-free before FY 2020–21, after which the dividend income of investors is added to their taxable income and taxed as per the normal slab rate.
A Better Option to choose :-
Choose SWP ,
If investors want a regular income source, then it is the best option to choose better for retired people who want regular income as a pension amount.
If annual income falls into a higher tax bracket, Investors will have to pay significant amount of tax over dividend income. So it is better to choose the SWP if investors want to avoid paying tax.
Choose Dividend Plan,
If investors are not worried about the fixed regular income, then it is a better option. Investors also choose this option if it falls in the low tax bracket and they have to pay less amount of tax than they can choose from this plan.
Conclusion:-
Both the dividend plan and SWP are two different investment options that provide regular income. But to choose which option is better depends on a subjective decision of individuals. SWP is beneficial for those who want regular income at regular interval, while the dividend plan is suitable for those who are looking for regular dividend from the profit earned by the mutual fund house. Therefore, it is important to understand the difference between two investment options and choose the best option as per the financial needs and risk appetite.
(This article represents the views of the authors only and does not intent to give any kind of legal opinion on any matter)
Authors: Dhruv Dangodra | Associate Consultant | +917506864485 | dhruv.dangodra@masd.co.in
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