Jun 18, 2018 4 min read

Why Should You Choose SWP Over Dividend Plans?

Read this blog to find out how SWP is better for you if you’re looking for an additional source of income.
It's noticed that post-April 1, 2018, investors are increasing their investments in SWP over dividend mutual fund schemes. This switch can be due to many reasons which make SWP a much better investment option than dividend schemes.

With the announcement of Union Budget 2018, Finance Minister Mr. Arun Jaitley introduced 10% tax on LTCG without providing the benefit of indexation. This additional tax liability on income distributed by equity funds affected the investors who used to earn dividend without paying tax. The dividend distribution tax (DDT) impacted the ones who have opted for the dividend plan of equity-oriented funds. Thus, Systematic Withdrawal Plan (SWP) could be an ideal option for now. Let’s find out what SWP is and what are the other factors that make it more suitable for investors as per the experts at MySIPonline.

What Is Systematic Withdrawal Plan?

Systematic Withdrawal Plan, as the name signifies, is a plan where a fixed amount can be withdrawal periodically at fixed intervals. Here, the frequency and amount of withdrawal are selected by the investor.
For instance: If you have invested Rs 50,000 in a scheme, then you can set up a SIP to withdraw Rs 5000 every month for ten months on a specific date.

How Does SWP Scores Over Dividend Plans?

SWP can be a better choice than dividend plans over various fronts. Some of them are listed here:

1. Fixed payout surely

Such plans entail a stable payout to the investors at regular intervals. This denotes that there will be a point in time where the entire investment is wholly repaid along with the gains. However, when you opt for a dividend plan to invest in, the monthly income would be subject to the dividend by the scheme. Although there are a few funds which have delivered good returns on a consistent basis, the dividends for many funds have not been very regular. In case there are no realized gains that the scheme has made in a particular month, there will be no dividend at the end of the month. Thus, this attribute makes SWP a better option.

2. Taxation

  • Dividend distribution tax (DDT):Though the dividend paid by the mutual fund schemes is not taxed in the hand of investors, DDT has to be paid by the company. Apart from liquid funds and money-market instruments, the DDT of more than 12% is deducted from the dividend generated by debt funds. However, in case of SWP, there is no dividend or DDT, and this is the reason for the growing popularity of SWP.
  • Long-Term Capital Gains (LTCG):One one hand, where the dividends are taxed at a flat rate of 10 percent, the SWP option is more tax efficient as 1 lakh of LTCG is exempt of tax on the other. Thus, a small investor can avoid tax on his gains if the LTCG accrued on the amount withdrawn under the SWP remains below the Rs 1 lakh threshold.
    In case of an SWP when you opt for a growth plan in the initial years, the gain portion is much smaller. Therefore, most of the payout consists of the invested principal amount. Hence, with the re-introduction of LTCG tax on equity investments for gains over Rs 1 lakh p.a., the dividend option has become less appealing to the investors.

3. Avoid Market Risk

With SWP by your side, you can easily dodge the trap of market timing at the time when you’re redeeming your units. Just as in the case of SIP investment, where you can avoid the risk of the market at the time of investment, SWPs lower markets’ risk at the time of redemption.

4. Financial Independence for Family

There are various times in life where your family member requires financial help to address contingencies. For all those times, you can plan to dedicate an SWP to the member in need. This option facilitates you to withdraw money from the scheme at regular periods; say monthly, quarterly, half-yearly, or annually and hold the potential to accrue returns on the remaining investments over a period.

Experts’ View

As stated in the points above, SWP scores over dividend strategy on several fronts. The experts at MySIPonline believe that SWP works best when you’ve invested and accumulated a significant sum. Besides, being a small investor, you may be able to avoid tax on your gains altogether if the long-term gains accrued on the amount withdrawn under the SWP remains below the threshold value of Rs 1 lakh.

If you wish to seek information on one such SWP scheme, read All You Need to Know About SBI Mutual Fund’s Recent Launch: Bandhan SWP

In case you need to seek experts’ opinion in this regard or clear any of your doubts concerning mutual funds, connect with us at MySIPonline in no matter of time. Our financial analysts are ever-ready to serve you with all their might.

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