There are times when our monthly salary isn’t sufficient, and this leaves us broke at the end of almost every month. This is mostly because today’s youth believe in spending more and saving less. However, this trend is changing because nowadays a lot of youngsters are considering saving some amount from their monthly income and investing in mutual funds. If you, too, wish to improve your existing financial condition and have the will to remain invested for the long run, you also stand a chance to seek some capital appreciation through mutual fund investments.
Just like picking the right
mutual fund is a task one should not take lightly; the same applies when it
comes to redeeming or withdrawing your potential gains. Mutual funds generally
option growth and dividend option for its customers. However, a new type of
withdrawal plan is available, which allows investors to withdraw their gains
Systematic Withdrawal Plan (SWP)
is a tool in which mutual fund investors can use to regulate their cash flows.
If you wish to find out more about SWP and mutual fund dividends and also wish
to understand which one is better, read further.
What are mutual fund dividends?
Mutual funds are generally
available to investors in two kinds of schemes: Growth and Dividend. To
understand what mutual fund dividends, are you will have to understand the
meaning and difference between both growth and dividend. In the growth option,
if the scheme manages to make any profits, these gains are invested back into
the scheme. Over time, this may result in the growth in the net asset value of
the scheme. Due to some vagaries in the market, if the scheme fails to perform,
the NAV of the fund goes down.
On the other hand, the dividend option
refrains from reinvesting your gains or profits made by the fund. Investors
have a payout option where these gains or profits made by the scheme are
distributed in the form of dividends to the investor from time to time. The
amount and frequency of dividends, however, are never guaranteed. Dividends can
only be declared when the scheme makes a profit. This also is solely at the
discretion of the fund manager.
What is a Systematic Withdrawal
While it’s important to plan well for creating long term wealth, it is equally important to plan for additional expenses as well. That’s when SWP (Systematic Withdrawal Plan) comes into the picture, a powerful tool that works just like SIP. But here, instead of investing at regular intervals, you get to withdraw at regular intervals. The withdrawals can be customized basis of the investor’s requirement as they continue investing in a particular mutual fund scheme. SWP not only helps one withdraw money at regular intervals but the remaining invested amount after the withdrawals have the potential to grow. So this way, you can get more than what you have planned for, which in turn proves to be beneficial in the long run keeping the inflation rates in mind.
Which is a better option – mutual
fund dividends or SWP?
We have distinguished dividends and SWP on
specific parameters to help you understand and evaluate which option might be
better for you.
What are the tax implications on SWP?
The tax implication on each SWP redemption is equivalent to what equity or debt fund investors have to pay while redeeming their units. Units redeemed before one year by equity-oriented scheme investors are eligible for short term capital gains. For debt fund investors, short-term capital gains tax is applicable for units held less than 36 months and long-term capital gains on units held in the long run.
So now that you know that difference between mutual fund dividends and SWP, what is going to be your go-to withdrawal option?
Photo by Adeolu Eletu on Unsplash
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