Dividend Mutual Fund vs Systematic Withdrawal Plan (SWP)
Do you have a lump sum amount of money? And do you use a small part of this money on a regular basis? If yes, then obviously you haven’t used that money to invest at all. There is a way to easily invest that money and still have a regular income every month. There are different options that offer different types of returns and regular incomes. What is right for you may not necessarily be right for someone else.
Why Invest the Lump Sum Amount?
If you have money and need some part of it regularly, you might think it is counter-intuitive to invest it. However, every single rupee that you do need should be invested. Here’s why:
- Poor Planning: Most people are unable to estimate the requirement for money in the future. More often than not, they tend to underestimate it.
- Life Expectancy: You are most likely going to live longer than your grandparents did. This is thanks to the rapidly advancing healthcare industry. People are leading much healthier lifestyles now. And that means you’ll need more money after you retire.
- Rising Healthcare Costs: With an increase in age, there is also an increase in medical bills. The list of required medicines will grow longer and so will the costs associated with treatments.
- Improving Lifestyle: Eventually, everybody wishes to spend on better and more expensive products and services. In all likelihood, you will want to spend more too.
- Past No Indication of Future: Unexpected events happen all the time. If the unexpected is in your favour, you’re lucky. But if it isn’t, you should have a buffer.
Which Mutual Fund Plan to Go For?
For regular income, there are two options you can explore: Dividend Mutual Fund vs Systematic Withdrawal Plan
Dividend Mutual Fund
What Is a Dividend Mutual Fund?
When people talk of mutual funds, they commonly refer to growth mutual funds. In growth mutual funds, the amount invested by an investor remains with the fund till the investor redeems the amount. While the amount is with the mutual fund, the fund manager invests the money based on his analysis. Whatever gains are made in this process get reinvested.
Dividend mutual funds, on the other hand, are very similar to growth mutual funds. They share most traits like the fund manager, investment style, etc. The key difference between the two is that dividend mutual funds pay back dividends to the investor. Usually, the dividend amount and frequency is decided by the fund manager. Neither the dividend amount nor the frequency is fixed.
Why Choose a Dividend Mutual Fund?
Dividend mutual funds are not for everyone. It makes sense for a certain set of people only.
After having invested, dividend mutual funds start paying back dividends relatively quickly. Many people who lack the patience to wait for their investments to show results opt for dividend mutual funds. At the same time, there are those who are sceptical of a particular mutual fund’s performance. To minimize risk, it makes sense for such people to receive dividends so as to reduce their money’s exposure to risk.
Many people are satisfied with such an arrangement and prefer to receive such dividends over other forms of investment as this involves relatively less stress for them.
Systematic Withdrawal Plan (SWP)
What is a Systematic Withdrawal Plan?
Systematic Withdrawal Plans of SWPs is the reverse of Systematic Investment Plan (SIP). In SWP, you invest a lump sum amount in a mutual fund and then keep redeeming a fixed amount every month. This ensures that the amount of money received every month is the same. Also, the time interval is fixed too. So investors can be assured of a fixed amount every month which is not the case with dividend mutual funds.
SWPs can be set up in growth mutual funds. Every time you redeem, you will be selling units of the mutual fund that you have. In times when the NAV of the mutual fund is high, you will have to sell less number of units to get the same amount. On the other hand, when the NAV of the mutual fund is low, you will have to sell more units to get your fixed monthly amount. Over a long period of time, rupee averaging will ensure you don’t sell your mutual fund units too cheap.
Why Choose a Systematic Withdrawal Plan?
There are several advantages of using SWP for getting a regular income:
- Fixed regular income: In the case of dividend mutual funds, the amount and frequency of payment of dividends are decided by the fund manager. If you’re relying on the money for running your expenses, a low or infrequent dividend might hamper your life.
- Tax advantage: You as an investor do not need to pay any tax on the dividends received by you. However, dividend mutual funds pay a Dividend Distribution Tax (DDT) which is taken from the dividend amount before it reaches you. In the case of SWP, if you invest in equity mutual funds and start withdrawing after a year of an investment, you have to pay no tax at all.
What Is the Difference Between Investing in Dividend Mutual Fund vs Systematic Withdrawal Plan?
In the case of dividend funds, the amount and frequency of payment of the dividend are decided by the fund manager of the mutual fund. If you are relying on a fixed amount of money at the end of every month, dividend mutual funds can hamper your plans when they pay an amount below what you need.
In the case of SWP, you get a fixed amount at the end of every month. If the fund’s performance is good, the SWP will last longer. If the performance is poor, it’ll finish sooner. And if your annual withdrawal is less than what the fund generates every year, you can continue earning from this mutual fund forever!
Nearly all mutual funds allow SWP.