Category: Investment Management

SWP vs. Dividend Pay-out

Many investors would look for consistent cash flows for their Regular Income needs. These investors usually encounter two types of options.

  • Dividend Pay-out Option.
  • Systematic Withdrawal Plan (SWP).

Dividend-paying mutual funds have been an attractive option for many investors. Though many mutual fund schemes have excellent dividend pay-out track records, we must understand that mutual fund dividends are not guaranteed. Mutual fund dividends are paid at the fund manager's discretion and from the reserves created for regular cash flows for investors.

Similarly, the Mutual fund Systematic Withdrawal Plan (SWP) is another option for investors to receive fixed cash flows from their investments. Though dividends and SWP may seem similar, we should understand the key differences.

One crucial parameter is the tax consequence between the SWP & Dividend Pay-out since FY2020-21 Union Budget. 

Let's understand the two options in detail.

Dividend Pay-out

Asset Management Companies (AMCs) pay periodic dividends to the investors who opted for the dividend payout option. As per SEBI, mutual fund dividends must be paid from the accumulated profits of the scheme. Fund managers cannot pay dividends just because NAV has appreciated. They can pay dividends only from gains realized by selling stocks at a higher price than the purchase price.

Investors should also understand that the fund manager may not distribute the entire profits booked as dividends. They may keep a portion of gains realized in a reserve account and only pay a part of the profit as dividends. This is done so that they continue paying dividends from the accumulated profits reserved during the periods where the scheme may not have realized gains. If no money is left in accumulated profits reserve, the system will not be able to pay dividends until they make profits through portfolio churning. 

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