Dividend plan vs SWP: Which one is best for you?
Dividend plan v/s Systematic Withdrawal Plan (SWP): When anyone gets the regular cashflow then why he or she will not be happy? Regular income is necessity either in form of active or passive income. Getting a passive income like dividend, interest, rent etc is must since you get money without doing anything. But the question is which one is best? Two most popular form of regular income plan are Dividend plan and Systematic plan. Let’s compare which one to choose for regular income through this article with an investment perspective.
1️⃣Flexibility of fund:
Systematic Withdrawal Plan (SWP) allows investors to determine the amount and frequency of payouts, redeeming units accordingly to generate the fixed amount chosen by the investor. In the case of the dividend option, the asset management company determines the amount and frequency of dividend payments based on the profits generated by the portfolio. Therefore, a regular cash flow is not guaranteed.
2️⃣ Investment Objective:
SWP caters to investors who desire to periodically withdraw a fixed amount from their investment, regardless of its performance. On the other hand, a dividend plan suits investors seeking regular income through dividends, which are declared by the asset management companies based on their evaluation of distributable profits. Investors who opt for SWP typically prefer Mutual Fund schemes with low risk tolerance, such as liquid funds or ultra short-term funds. The reason behind this preference is that these schemes allow the capital position to remain unaffected. Conversely, when it comes to Mutual Fund dividends, individuals have the flexibility to select any type of scheme based on their investment duration and risk appetite.
3️⃣Surety of Receipt:
SWP offers high predictability as investors continue to receive cash flows irrespective of market conditions. In contrast, a dividend plan may or may not declare dividends if the scheme's performance does not warrant it.
4️⃣ Taxation:
The most significant factor in determining the investor's choice is taxation. In the case of the dividend option, the received dividends are added to the investor's taxable income and taxed according to their income slab. However, if the investor chooses a growth plan and subsequently opts for an SWP, taxes are calculated based on the capital gains upon redeeming the units. The capital gains tax depends on the holding period and the type of mutual fund in which the investor has invested. The amount of capital gains tax is determined by the number of units being redeemed.
5️⃣ Capital Erosion:
In the context of SWP, the capital investment is reduced or eroded as the redemptions are made from the initial investment rather than the investment's generated revenue. On the other hand, dividends do not lead to any reduction in the capital amount.
Last Words
To summarize, a systematic withdrawal plan (SWP) offers more predictability in returns and greater flexibility to adjust withdrawal amounts and frequencies. SWP is recommended for individuals who rely on their investment corpus to meet their daily needs and essential lifestyle expenses. In such cases, where expenses are fixed, a defined inflow is necessary to cover these expenses.
However, if an investor simply wants to enjoy the withdrawal of profits and is not reliant on the investment for their day-to-day necessities, the dividend option may be more suitable. It is advisable to seek the guidance of a financial advisor who can assess individual parameters and provide recommendations on the preferred option.
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