Dividend vs SWP: Which is the best option for getting regular income from investing in a mutual fund?

As investments in mutual funds (MF) are capital investments and are subject to market risks, it is said that you should invest in MF that part of the money, which you can save for the long term. This would reduce the risk of capital loss.

However, the purpose of investing in a mutual fund (MF) depends on an investor’s financial goal.

If you want to invest to accumulate money to achieve a long-term financial goal, it is best for you to invest in equity-oriented MF programs for at least 5 years. The longer the investment period, the lower the risk of losing money and the higher the chances of getting higher returns.

If the investment motive is to earn inflation-adjusted and tax-efficient returns in the short term, it is best for you to select a debt-friendly MF program.

However, if you wish to obtain a regular return from the FCP’s investment – whether it is a short or long term investment – you have two options – either opt for the dividend distribution option or Choose the Systematic Withdrawal Plan (SWP) option.

Distribution of dividends

Asset management companies (AMCs) pay periodic dividends to investors who have opted for the dividend payment option, once sufficient earnings are accumulated in a payable program. The timing and amount of the dividend depends on the accumulation of earnings.

Systematic withdrawal plan

To obtain a regular return, an investor may choose to withdraw money by redeeming certain shares on a periodic basis. The investor must decide the time and the amount of the withdrawal.

Dividend payout vs. SWP

To know which one to choose, you need to know the difference between the two options on different parameters:

Flexibility

Compared to the payment of dividends, the SWP is more flexible. Indeed, from the day of the investment, the dividend is only paid on a plan when the AMC decides to pay according to the accumulation of earnings on the plan. Depending on profitability, the duration and amount of the dividend may vary.

On the other hand, an investor can choose when to start the SWP and also how much to withdraw in how many days/months. Depending on the performance of the system, an investor can increase or decrease the amount of the withdrawal as well as the duration of the periodic withdrawal.

Taxability

Dividends are now treated as income in the hands of the receiver. Thus, the amount of the dividend will be added to the total income of the investor. If an investor has no taxable income – including the dividend received – he does not have to pay tax on the dividend received. However, for an investor in the top tax bracket, 30% tax plus tax and surtax, if any, will be payable on the dividend income.

The amount withdrawn under the SWP is subject to capital gains tax. If the withdrawal is made on units of debt-focused investment funds purchased within the last three years, the gain is treated as a short-term capital gain and the amount withdrawn is added to the investors’ income and treated as same way as the payment of dividends. . If the withdrawal is made after three years from the date of purchase of the MF Debt Plan Units, the gain is treated as a long-term capital gain and 20% tax is levied after indexation.

If the amount is withdrawn within one year from the date of investment in an equity investment fund, the gain is treated as a short-term capital gain and a tax of 15% is levied on the gain. However, if the amount is withdrawn after one year from the date of investment in an equity-oriented MF program, the gain is treated as a long-term capital gain and a tax of 10% is levied on the amount of winning over Rs 1 lakh. in a financial year.

So, in terms of flexibility and tax benefits, SWP has an edge over the dividend payout option.

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