SWP vs Dividend Plan Which is Better for Post Retirement Income: Even if working people stop getting salary after retirement, the expenses still remain. That is why arranging for regular income is a very important part of retirement planning. Systematic Withdrawal Plan (SWP) and Dividend Plan of mutual funds are two such options which can be used to get regular income after retirement. But there are many important differences between these two options. If you are planning for regular income after retirement, then it is important for you to know which option between SWP and dividend plan can be more suitable for you.
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What is Systematic Withdrawal Plan (SWP)?
Systematic Withdrawal Plan (SWP) of mutual funds is an option in which investors withdraw a fixed amount from the corpus of their fund at fixed intervals. The remaining part of the corpus remains deposited in the same fund on which there is a possibility of profit. This option is better for those who want to maintain their investment along with earning regular income. Under SWP, investors can withdraw money monthly, quarterly, or once a year. This scheme helps you achieve the dual goal of providing you with the required cash flow as well as achieving growth on the remaining capital.In Systematic Withdrawal Plan, investors can decide for themselves when and how much money they want to withdraw. In this you can withdraw only as much money as you need. The remaining money remains invested in the fund, so that returns continue to be generated.
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What is the meaning of dividend plan?
Dividend plan means such a scheme of mutual fund, in which the fund house distributes the profits among the investors. Here the dividend received by investors is based on the performance of that mutual fund. That is why the amount of dividend and the time of payment are not decided in advance. It completely depends on the market condition and the profits of the fund.
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What is the difference between dividend plan and SWP?
In SWP, investors themselves decide how much amount, when and how often they will withdraw. In the dividend plan, when and how much money the investor will get depends on the performance of the fund.There is no tax on Long Term Capital Gains (LTCG) up to Rs 1.25 lakh in a financial year on equity funds held for more than a year in SWP. If the profit is more than this in a year, LTCG tax is levied at the rate of 12.5%. At the same time, no such exemption is available in dividend plan. That means, tax has to be paid on the income from dividend plan at the rate of income tax slab.
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What’s right for you between SWP and Dividend Plan?
You can decide for yourself when and how much money you want to withdraw from your funds deposited in SWP, keeping in mind your needs. Whereas how much money you will get in a dividend plan is decided by the performance of that fund. If the profit of the scheme is low, or if it incurs losses, then there is a risk of the dividend being reduced or not being received. The tax benefits associated with LTCG also prove SWP to be a better option.
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Overall, SWP is better in terms of regular income and tax saving after retirement. But before taking any decision regarding investment, please understand that the returns in any equity based mutual fund are not fixed. Be it Systematic Investment Plan (SIP) or Systematic Withdrawal Plan (SWP). That is, under SWP, you can decide when and how much money you want to withdraw, but there is no guarantee as to how much return the mutual fund will generate on the remaining money in the corpus. Apart from this, market related risk is more in equity funds. Therefore, before taking any decision related to investment, the risks associated with it should be understood thoroughly and in case of any confusion, the help of a SEBI registered investment advisor should be taken.
