The purpose of investing in a mutual fund (MF) scheme, on the other hand, is determined by the investor's financial objectives. If you want a consistent return on your MF investment, whether it's a short-term or long-term investment, you have two options: the dividend distribution option or the systematic withdrawal plan option (SWP). Despite the fact that dividend and SWP appear to be identical, there are significant variances between the two. Let us understand both the options in detail.
Dividends is a type of the return investors yield by investing in mutual funds. Dividends are profit payments that a firm makes to its stockholders. This is done when a company's earnings are excessively high. When this occurs, a portion of the earnings will be distributed to the company's investors. If the dividends are not paid out, the money is reinvested in the company to help it develop and expand.
Systematic Withdrawal Plan
Investors can redeem their mutual fund assets using SWP. It allows investors to redeem a certain amount on a regular basis. Withdrawals can be made weekly, monthly, quarterly, or semi-annually, depending on the investor's preference. Before selecting for SWP, investors should keep in mind that it is a method of redeeming assets rather than simply getting gains. As a result, when an SWP is processed, the appropriate taxes are assessed.
Dividends vs SWP
Cash Flow: When investors are in need of cash, they can use SWP to get it. They can turn it off when they no longer require it. Dividends, on the other hand, will continue to flow even when the investors have no need for it. There isn't a way to stop the inflow.
Taxability: As SWP is a sort of withdrawal, investors are subject to the appropriate capital gains tax, which varies based on the holding duration and mutual fund type. The amount of capital gains tax due is determined by the number of units redeemed. In case of dividends ,the fund house pays the relevant rates of dividend distribution tax, and the dividends received by the investors are already taxed. There is no capital gains tax because the investors are not redeeming their shares.
Withdrawals: In the case of SWP, the amount of withdrawal is fixed, and investors can withdraw as much as they like; however, in Dividends, payouts vary with performance and are never guaranteed.
Portfolio effects: The Net asset value( NAV) of an SWP is untouched, but the overall investment is reduced when fund units are redeemed, whereas the NAV of a dividend is reduced, but the number of units kept is unaffected.
Flexibility: SWP is more adaptable than dividend payment. This is because, starting on the day of investment, a scheme's dividend is paid only when the AMC decides to pay it based on the scheme's accumulation of gains. An investor, on the other hand, has the option of choosing when to begin the SWP as well as how much to withdraw over how many days/months.
Let's say you have a million rupees and wish to earn ₹1 lakh each month. One alternative is to invest in the dividend option and wait for a dividend declaration from the fund company.
There is a chance that the fund firm will pay a dividend that meets your needs, but there is also a chance that it will not. You will not be able to choose the quantum or frequency. As a result, it may not meet your requirements. You will provide a standing instruction to provide ₹1 lakh every month by executing SWP. As a consequence, you'll be able to define periodicity and quantum, and you'll be able to rely on it.
Therefore in such cases, SWP is considered to be a better alternative. However, both SWP and dividend mutual funds offer their own set of benefits and drawbacks. Investors must evaluate both strategies and select the most appropriate one.