Mutual funds are a great investment option when you want to see compounding growth and steady cash flow for your retirement. A steady income is crucial in old-age and dividend plans, and SWP can provide you with the financial support you need.
However, what is perfect for you depends on your required financial support, investment choices, and market conditions. It is important to go for low-risk options during retirement so your existing finances stay safe while you still enjoy gains.
So, out of dividends and SWP, which one is the right choice for you? Let us answer your questions.
A brief idea of dividend plans
A Dividend Plan (referred to as IDCW now) is a mutual fund option that provides investors with regular dividend payouts from the fund’s earnings. These dividends are disbursed from the profits generated by the mutual fund itself. Dividend plans depend on capital appreciation and payouts for regular income. The AMC decides the frequency of dividend payouts, which can be weekly, monthly, or even annually.
There are no fixed dividends since they depend on market performance and profits incurred. However, the company may also choose not to pay dividends, depending on the profit generated.
A brief idea of systematic withdrawal plans
Systematic withdrawal plans allow you to withdraw a fixed amount of money from your mutual fund investments. You can decide the frequency from weekly, monthly, and quarterly to annual withdrawals according to your financial needs.
The amount on these withdrawals is fixed, so the market volatility does not affect your income. SWP provides you with more control over your finances and is a less risky option.
Differences between dividends and systematic withdrawal plans
Portfolio impact
If you opt for a dividend option for income, the net asset value(NAV) gets affected. However, the number of units you hold stays the same.
SWP does not affect the NAV, but the regular withdrawals reduce the fund units eventually.
Cash flow
Cash flow from dividends depends on the market and the asset management company. Hence, you have no control over the amount of money you receive, when you can receive it, or stopping the inflow when you do not require an income.
SWP offers you the flexibility to choose the time and amount of cash withdrawal, with complete controls to stop it whenever needed.
Taxable income
When you invest in mutual funds, dividend funds are taxed based on income tax slab rates. If you receive dividends totaling more than Rs 5,000, 10% TDS will be deducted as tax before you get the money.
However, when you withdraw money using SWP, you will be taxed based on the capital gains, which vary depending on how long you have held the investment and the type of mutual fund you have chosen. The amount of tax you pay is also determined by the number of units you redeem.
Reasons why a systematic withdrawal plan is better than a dividend plan
Control over cash flow
Since SWP provides you with a fixed amount, you have complete control over your withdrawals according to your financial requirements at the time. The fixed payout also ensures complete repayment of your investments with returns in the long run. This security makes it ideal for your retirement plans.
Avoids risk
SWP is low-risk compared to dividend plans, which are entirely dependent on market performance and company profits. SWP allows you to withdraw a predetermined amount irrespective of what the current market conditions are, providing a secure platform for your finances.
Lower taxes
Amount received as dividend is fully taxable as per your personal tax slab. If you qualify for a higher tax slab, dividend income could be more expensive for you since it is taxed based on slab rates. However, SWP from an investment is taxable only to the extent of the actual gains and not on the full amount. If the SWP is from equity funds, long term gains will be taxed at a lower rate of 10% and short-term gains are taxed at 15%.
If you sell stocks at a loss, you can also use those losses to reduce taxes on any profits from selling assets for the next eight years. This makes SWP a better option for short- and long-term gains. However, it is important to remember that these tax exemptions only apply to equity funds, and debt funds are taxed as per the slab rate.
Conclusion
Whether you are planning for retirement or looking for options to earn an extra regular income, systematic withdrawal plans are the clear winner for you. They offer security, providing you with steady financial support to help you manage your monthly expenses better. However, remember to be aware of all your financial decisions and act according to your risk appetite to leverage your options the best.
Need help understanding what plan is suitable for you? Reach out to the experts at Floatr and get the financial investment assistance you need. Download our app or give us a call to start your investment journey today.
