Mutual Fund SWP Vs MF Dividend Plan: Which Is Better For Senior Citizens?  

A steady cash flow is vital in post-retirement years. Many seniors invest in fixed-income assets like fixed deposits (FDs) or government securities (G-secs) for income; however, some advisors suggest investing a portion of their portfolio in equity mutual funds can help them seize maximum growth opportunities and rein in the inflationary pressure. Let us know more about both Mutual Fund SWP and MF Dividend Plan. 

Vivek S.G., a certified financial planner and founder of Wealth Crafts, a Securities and Exchange Board of India (Sebi)-registered investment advisor, explains, “An FD with a 7 percent return for someone with a 30 percent tax rate would give a post-tax return of 4.9 percent. And if inflation is at 6 percent, the total return would be -1.1 percent (7% - 2.1% (30% of 7%) – 6%). This will certainly erode the purchasing power of the retirees.” 

Clearly, to fight inflation, those with a low-risk appetite should also consider equity, which can grow more than guaranteed-income instruments like FDs. 

While saving and investment are vital in financial planning, withdrawal options are also important. Mutual funds have two withdrawal options: a systematic withdrawal plan or Mutual Fund SWP and the MF dividend option. 

According to Vivek, a combination of fixed income and hybrid and equity funds should be considered to tackle the issues of inflation and regular income after retirement. Investors can choose a debt fund, a conservative hybrid fund, a balanced fund, or a dynamic asset allocation fund, depending on their risk tolerance and preferences. 

Let us explore these two withdrawal options in mutual funds for seniors. Also Read: Sovereign Gold Bond 2023-24 Series III: Subscribe Before Window Closes Today

Dividend and IDCW Options 

One may choose either the growth option, where the value of the mutual fund units keeps accumulating, or the Income Distribution-Cum-Capital Withdrawal (IDCW) option, where a dividend is paid to investors from the scheme’s distributable surplus from time to time. Note that every dividend distribution reduces the net asset value (NAV) against the dividend paid and other levies applicable. 

Systematic Withdrawal Plan (SWP) 

SWPs are not mutual fund payments but the investor’s withdrawal plan. They can choose the withdrawal frequency as per their cash flow needs. However, they should consider the following points before deciding on these options. 

Market Volatility And Cash Flow: In the IDCW option, asset management companies pay the dividend, but the amount and frequency are often not certain. In comparison, investors have better control over their cash flow in a SWP. They can decide the amount and frequency as per their requirements. Vivek says, “SWP offers more control during market volatility, while dividends may fluctuate based on fund performance.” 

Taxation: Taxation is the most critical factor in determining the options. As dividends are subject to dividend distribution tax (DDT), the SWPs incur capital gain tax. While taxation is as per the income slab rate on dividend distribution, the SWP tax depends on whether the investment is in equity or a debt scheme. Equity schemes incur a tax rate of 15 percent on short-term capital gain (less than 12 months) and 10 percent on long-term capital gain. 

Other Points: People may choose the dividend option if they do not need cash flows in the future. So, if one has a regular income flow, the IDCW option will only attract more tax liability and is not advisable.

What Option To Choose For Cash Flow? 

Vivek says, “Dividend income is taxed as per slab rates. Hence, this option is not a tax-efficient way of withdrawing the retirement corpus for someone in the higher tax slabs.” He adds, “SWP from an equity fund would provide Rs 1 lakh exemption on long-term capital gains (considering the holding period will be 12 months or more) and excess gains will be taxed at only 10 percent, and the short-term capital gains are taxed at 15 percent. In addition, if you exit equity in losses, you can offset your losses against capital gains for the next eight years.” 

So, if you want a regular payout from your mutual fund investments, SWP is better than equity-oriented funds as it enjoys a tax exemption on long-term gains. In the short term, the tax rate is also lower, which is good if you are in a higher income bracket. But note that if the investment is in debt funds, the withdrawals will be taxed as per the slab rate. So, choose an investment scheme accordingly and withdraw funds, keeping taxation on cash flow in mind.