Dividend vs SWP: 4 Reasons Why SWP Is Better Than a Dividend Plan

In general, SWP scores over the Dividend plan on most fronts. Here is the list of 4 reasons why SWP is a better option than a Dividend plan:

1. Surety of Fixed payout

A Systematic Withdrawal Plan (SWP) entails a stable payout to the investors at predetermined intervals. This implies that the investments will be repaid entirely along with the gains at some stage.

Going for the dividend plan would mean that your monthly income would be subject to the dividend declared by the scheme you have chosen to invest in.

Though few funds have given good returns consistently, the dividends for most of the funds have not been remarkably consistent.

So, an investor is assured of getting a fixed amount at their predetermined frequency through an SWP.

However, the payout is not specific in a dividend plan. Dividend payments are neither fixed nor guaranteed. If the fund house makes no realized gains be no dividends at the end of the month.

2. Taxation

- Dividend Distribution Tax (DDT)

The dividend paid by mutual funds is not taxed in the hands of investors, but the mutual fund company has to pay a dividend distribution tax (DDT).

Apart from money market and liquid funds, a DDT of more than 12.5 % is deducted from dividends coming from debt funds. Whereas in SWP, there is no dividend or any DDT thereof.

DDT imposed by the government on dividend payments made by the equity-oriented mutual fund schemes is the primary reason for SWP’s popularity.

Investors of the dividend option of balanced funds have become habituated to monthly dividends due to a controversial practice started by some mutual fund houses to declare dividends every month.

- Long-Term Capital Gains (LTCG)

SWP is more tax efficient as ₹1 lakh of LTCG is tax exempt, while dividends are taxed at a flat rate of 10%.

Also, an investor of a small sum may be able to avoid tax on his gains, f the LTCG accrued on the amount withdrawn under the SWP remains below the ₹ 1 lakh threshold.

In the case of SWP when you opt for a growth plan in the initial years of an SWP, the gain portion is much smaller. This is because most of the payout consists of the principal invested.

Hence, after the government introduced the Long Term Capital Gains (LTCG) tax on equity investments for gains over ₹ 1 lakh p.a., the dividend option has become unappealing to many investors.

3. Avoid Market Risk

SWP helps to avoid the trap of market timing at the time of redeeming the equity mutual fund units: Just as systematic investment plans (SIP) avoid market risk at the time of investment, SWPs lower market risk at the time of redemption.

4. Financial Independence for Your Family Members

In life, however, there are times your family members require your financial assistance to address their contingencies. Giving money a lump-sum isn’t the most helpful approach in such a case. Your loved ones might need your help for an extended period.

Under such circumstances, you can think of dedicating an SWP to a family member in need. Mutual fund houses have started offering you unique options to transfer money to your family members.

SWP allows you to withdraw a fixed sum of money from a mutual fund scheme regularly (say monthly, quarterly, half-yearly, and annually) and hold the potential to clock returns on the remaining investments over time.

Conclusion

SWP and Dividend Plans are two different investment options that provide regular income to investors.

SWP is suitable for those who want to withdraw a fixed amount of money at regular intervals without affecting the principal amount, while the Dividend Plan is suitable for those looking for regular dividends from the profits earned by the mutual fund. Therefore, it is essential to understand the differences between these two investment options and choose the one that suits your financial needs and risk appetite.