Dividend Mutual Fund vs Systematic Withdrawal Plan (SWP)

Dividend Mutual Fund vs Systematic Withdrawal Plan (SWP)

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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 gets 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 dividend 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 skeptical 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 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:
  1. Fixed regular income: In case of dividend mutual funds, the amount and frequency of pay of dividend is 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.
  2. 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 case of SWP, if you invest in equity mutual funds and start withdrawing after a year from investment, you have to pay no tax at all.

What Is the Difference Between Investing in Dividend Mutual Funds and Investing via SWP?

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In the case of dividend funds, the amount and frequency of payment of the dividend is 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!