The
dividend season has arrived. Fund houses announce big payouts not only to mop
up funds and increase their AUM, but also to project their investor friendly
policies as they help investors generate cash flows periodically.
But
the question is
- Are dividends really helpful to the investors looking for extra income?
- Are there no other options for the investor to generate steady cash flows preferably during their retirement without impacting their investment?
The
answer is YES.
It’s
known as SYSTEMATIC WITHDRAWAL PLAN (or SWP as it is commonly known).
The
purpose of both the option is to generate cash flows for the investor(s).
The
differences between the two are listed as under:
- Dividends are paid out of booked profits only, (earlier they (fund houses) were allowed to pay dividends out of reserves also). On the other hand, SWP once registered, continues as long as the investments are alive.
- Payment of dividend is a prerogative of the fund houses. They are not bound to pay dividends if the distributable surplus is insufficient or to conserve resources when markets are in corrective mode. SWP payout on the other hand, continues irrespective of market condition, or level of distributable surplus.
- MF dividends, unlike corporate dividends, are not income in the hands of the investor. The dividends (MF) paid out are deducted from the NAV of the scheme the next working day. In other words, it’s your own money coming back to you in the form of dividends. In SWP, requisite number of units are redeemed and remitted to the investor on a pre-set date chosen by the investor.
- NAV of units held gets reduced in dividend payout option, while unit holdings are reduced in case of SWP.
- Dividends are taxed at source irrespective of the tax slab in which the investor falls, while the SWP which consists of capital + profits may not attract any taxation depending on the tax slab in which the investor falls. Hence, SWP is a tax-friendly manner of withdrawing money from your MF holdings.
- A fund house may cancel dividend though announced. Monthly payouts under SWP are set in auto mode and can be cancelled only by the investor.
- Dividends are useful in generating cash flows during the working life of the investor. SWP, on the other hand SWP is better in generating regular cash flows during post retirement.
- SWP is better option to fund your retirement, provided you plan well in advance.
