Since mutual fund (MF) investments are a matter of capital investment and market risk, it is said that you should invest that part of your money in MF, which you can save in the long run. This will reduce the risk of capital loss.
However, the purpose of investing in a mutual fund (MF) scheme depends on the financial goals of an investor.
If you want to invest to save money to meet long term financial goals, it is better for you to invest in equity-based MF scheme for at least 5 years. The higher the investment time, the lower the risk of losing money and the higher the chances of getting a higher return.
If the purpose of the investment is to adjust inflation, short-term tax efficient returns, then it is better to choose the right loan-based MF scheme for you.
However, if you want to get regular returns from MF investments – be it short-term or long-term investments – you have two options – either opt for dividend payment or opt for Systematic Withdrawal Plan (SWP).
Asset management companies (AMCs) pay dividends to investors who opt for the dividend payment option in a phased manner, once a sufficient profit has been credited to the payment scheme. The timing and amount of the dividend depends on the profit savings.
Systematic withdrawal plan
To get regular returns, an investor can withdraw money by redeeming some units in phases. The investor has to determine the time and amount of withdrawal.
Dividend Payment vs. SWP
To know which one to choose, you should know the difference between the two options in different parameters:
Compared to paying dividends, SWP is more flexible. This is because starting from the day of investment, dividends are paid in a scheme only when the AMC decides to pay based on the profit savings in the scheme. Depending on the profit, the duration and amount of dividends may vary.
On the other hand, an investor can choose when to start SWP and how much money to raise in days / months. Depending on the performance of the scheme, an investor may increase or decrease the withdrawal amount as well as the period of periodic withdrawal.
Dividends are now treated as income in the hands of the recipient. Thus, the amount of dividend paid will be added to the total income of the investor. If an investor does not have taxable income – including dividends received – he will not have to pay any tax on the dividends received. However, for an investor in the top tax bracket, 30 percent tax plus cess and surcharge, if any, will be payable on dividend income.
Withdrawals under SWP are subject to capital gains tax. If the purchases are made from units of the debt-based MF scheme purchased in the last three years, the profit is treated as short-term capital gain and the withdrawn money is added to the investor’s income and similarly treated as dividend payment. . If the loan-based MF scheme is withdrawn after three years from the date of purchase of the unit, the profit is treated as long-term capital gain and 20 per cent tax is levied after the index.
If the money is withdrawn within one year from the date of investment in an equity-based MF scheme, the profit is treated as short-term capital gain and 15 percent tax is levied on the profit. However, if the money is withdrawn one year after the date of investment in the equity-based MF scheme, the profit is considered as long-term capital gain and 10 per cent tax is levied on the amount of profit above Rs 1 lakh. In a financial year.
Thus, in the case of flexibility and tax benefits, SWP has an advantage over the option of paying dividends.