SWP or dividend payout mutual funds: Which is better?
What's the story
Systematic Withdrawal Plans (SWPs) and dividend payout mutual funds are two popular investment options for those looking for regular income. Both offer unique benefits, making them appealing to different kinds of investors. While SWPs allow you to withdraw a fixed amount at regular intervals, dividend payout mutual funds distribute earnings as dividends. Knowing the difference between the two can help you make informed investment decisions based on your financial goals and risk appetite.
SWP basics
Understanding Systematic Withdrawal Plans
A Systematic Withdrawal Plan (SWP) allows investors to withdraw a fixed amount from their mutual fund scheme at regular intervals, usually monthly. This offers a disciplined approach to accessing funds without having to sell off assets completely. SWPs can be customized according to cash flow needs, making them flexible for managing expenses or supplementing income.
Dividend payouts
Dividend payout mutual funds explained
Dividend payout mutual funds distribute earnings generated by the underlying assets as dividends to investors. These dividends can be received at different frequencies, such as monthly or quarterly, depending on the fund's policy. This option is ideal for those who prefer receiving income directly from their investments without having to make withdrawals from the principal amount.
Income consistency
Comparing income consistency
SWPs provide consistent income by withdrawing a fixed amount regularly, which can be planned according to individual needs. On the other hand, dividend payouts depend on the fund's performance and market conditions, which may lead to fluctuations in the amount received over time. Investors looking for predictable cash flow may prefer SWPs, while those willing to accept variable returns might opt for dividend payout funds.
Tax considerations
Tax implications of withdrawals vs dividends
The taxation of SWP withdrawals is based on capital gains tax rules, depending on how long the investment was held before withdrawal. Dividend payouts are taxed as per the individual's income tax bracket, since they are treated as part of taxable income when received. Understanding these tax implications is important for calculating net returns from either option.
Decision factors
Choosing based on financial goals
Choosing between SWPs and dividend payout mutual funds depends on your financial goals, risk tolerance, and income requirements. If you want regular cash flow without touching principal amounts too soon, SWPs may be the right choice. If you want to earn directly from investments and are okay with variable income, dividend payouts may suit you better.