Dividends are the way in which mutual funds payout the profits they make to their respective investors. A systematic withdrawal plan (SWP) is a way in which investors can pull out their investments. We have covered the following in this article:
1. What is the dividend plan in mutual funds?
Investors make two kinds of profits by investing in mutual funds; dividends and capital gains. Dividends are the distributions of profits that a company shares with its shareholders. This is done when the firm makes excessive profits in surplus. When this happens, the company will pay a part of the profits to its stockholders. If the dividends are not paid out then it is reinvested into the business for growth and expansion.
Mutual funds can be classified into dividend and growth plans. Dividend mutual fund plans provide returns through capital appreciation and dividend payouts. As per these plans, the dividends are typically declared by the fund houses on a regular basis. The net asset value (NAV) of these plans is lowered by the dividend amount and dividend distribution tax (DDT).
2. What is a systematic withdrawal plan?
Systematic withdrawal plan (SWP) is a way in which investors can redeem their mutual fund investments. One-time redemption is the other way of redeeming the fund units. Under SWPs, investors can redeem a certain sum on a regular basis. The frequency of withdrawal can be weekly, monthly, quarterly, or semi-annual, as per the investor’s choice.
One thing that investors must note before opting for SWP is that it is a way of redeeming investments and not just receiving profits. Therefore, when an SWP is processed, the applicable taxes will be levied. Hence, investors must be sure of what they need; redeeming the money invested or dividends.
3. Comparison of SWP with dividend mutual fund
The following table gives a comparison of SWP with dividend mutual fund:
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Parameter
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SWP
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Dividend Mutual Fund
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Impact on portfolio
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NAV is not affected but the overall investment reduces as fund units are redeemed.
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NAV is lowered but the number of units held will remain unaffected.
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Cash flow
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When the investors are in need of cash, then they can initiate SWP. When they don’t need, they can stop it.
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Will keep coming even when the investors have no need for the same. There is no option of stopping the inflow.
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Amount of withdrawal
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This is fixed and the investors can withdraw the amount they wish to.
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Varies with the performance and is never guaranteed.
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Taxability
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Since SWP is a type of withdrawal, the investors are levied with the applicable capital gains tax depending on the holding period and type of mutual fund they have invested in. The extent of capital gains tax depends on the number of units being redeemed.
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The fund house pays a dividend distribution tax at the applicable rates and the dividends that the investors receive are already taxed. There is no capital gains tax applicable as the investors are not making any redemption.
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4. Conclusion
Both SWP and dividend mutual funds are an excellent option to get regular income. Investors must assess both the plans and choose the most suitable one.
