Dividend Plan or SWP, which is preferable?

In a mutual fund scheme, you may have the option of choosing a dividend plan or a systematic withdrawal plan (SWP). If you are new to mutual fund investing, such an option may leave you confused and you may not be able to decide which one to go for. Let us find out what these options entail and help you choose the one that meets your financial needs and goals.

Dividend option

The dividend option will provide you dividend as and when declared by the fund house. The dividend may be declared as and when the fund house wishes to pay out part of the gains realised by the scheme to the investors. The dividend may be paid half-yearly or yearly. After the payment of dividend, the net asset value (NAV) of the scheme drops to the extent of the dividend pay-out. Hence, if the NAV of the scheme is Rs 30 and the dividend paid is Rs 3 per unit, the NAV will drop down to Rs 27 (Rs 30-Rs 3).

The dividend is distributed out of the gains realised by the scheme, but if the scheme has made insufficient gains or not made any gains during the financial year, the fund house may not declare any dividend. Hence, the dividend option is not suitable for those investors seeking regular monthly or quarterly income.

The dividends of all equity mutual funds are tax-free in the hands of the investors, but in the case of debt mutual funds, dividend distribution tax (DDT) is paid by the fund house, which further reduces the NAV of the scheme.

SWP option

The SWP option provides you with the option to withdraw specific amount at predetermined intervals, be it monthly, quarterly, half-yearly or yearly basis. So, if you opt for the monthly option, the amount will be credited to your bank account on a fixed date every month. The amount of withdrawal will depend on the initial lump sum amount invested and the period for which it is invested in the scheme. One can also accumulate the corpus amount through the systematic investment plan (SIP) and then opt for withdrawal through SWP.

As for taxation, since each withdrawal is a sale, withdrawals from debt fund under SWP will attract capital gains tax even after three years. However, since indexation benefit can be availed, the incidence of tax will be lower or even nil due to the indexed cost. In the case of equity scheme, withdrawals under SWP do not attract any tax if the holding period is more than one year. Hence, the SWP option is more tax-efficient than the dividend option.