The goal of any investor is to make good returns from their investment and meet their investment goals. While investment in equity is usually said to provide huge capital appreciation in the long run, they do not always provide the benefit of regular income like investment in debt instruments. Therefore, equity investments that provide regular income like dividends become an added incentive. But why is a regular passive income needed? Read on to know more about regular income options and how to choose them.
What is a Regular Income?
The very simple meaning of a regular income is the steady flow of earnings that is received at periodic intervals like monthly, quarterly, semi-annually, or annually. The most common source of regular income is through salary or profits and gains from business or profession, rental income, or similar sources of consistent income. However, when we talk about regular income from investments, it is usually in the form of regular passive income which requires minimal active involvement or effort from the investor and is received at regular intervals. Common sources of passive income include rental properties, dividend-paying stocks, interest from fixed deposits, royalties from intellectual property, and income from certain types of businesses or partnerships.
Why Do You Need a Regular Income?
Regular income in any form is the first step in providing for your family and meeting short-term to long-term goals. On the other hand, a regular passive income is like having your money work for you while you sip on a cup of chai! It’s like a sweet bonus that comes in without you breaking a sweat. Regular income and regular passive income enhance overall financial security and offer more financial freedom, allowing individuals to pursue their dreams and aspirations without solely relying on active work income.
Difference Between SWP and Dividend Plan
To gain regular passive income it is important to invest in the right assets after careful evaluation and ensure that they can provide their target regular income as well as meet other criteria of risk and investment capital. The top choices in this regard are often investing in a dividend plan or an SWP. Let us evaluate these options for better understanding and decision making.
|SWP is an investment plan where an investor withdraws a fixed amount at regular intervals from their mutual fund investment.
|A dividend plan is an option where mutual funds distribute profits earned from their investments as dividends to investors.
|Nature of payout
|SWP allows investors to receive a regular income stream by redeeming units from their mutual fund investment.
|Dividend plan provides periodic distributions of profits to investors without affecting the number of units held.
|Frequency of payments
|The frequency of payments in SWP is as per the preference of the investor and can be withdrawn at regular intervals like monthly, quarterly, or annually.
|Investors do not get any say in the frequency of payment in a dividend plan as the timing and frequency of dividend payouts are decided by the mutual fund company.
|Impact on investment
|SWP involves redeeming a specific number of units from the investment, potentially reducing the overall investment value over time.
|In a dividend plan, the number of units remains unchanged, but the Net Asset Value (NAV) may decrease after the dividend payout.
|In the case of SWP, the units redeemed will be taxable as capital gains depending on the nature of the fund and the holding period. For example, STCG on equity mutual funds is taxed at a flat rate of 15% and LTCG is taxed at 10% after the initial exemption of up to Rs. 1,00,000
|In the dividend plan, the dividend received is taxable in the hands of the investor under the head ‘Income from Other Sources’ at their applicable slab rates
|Risk and Returns
|SWP provides a more predictable income stream, but the returns may be influenced by market fluctuations and the fund’s performance.
|Dividend plan returns are dependent on the mutual fund’s performance, and the actual dividend amount may vary over time, making it less predictable than SWP.
Reasons why SWP is better than Dividend Plan
Now that we have understood SWP and dividend plan in detail, the next obvious question is which is the better option between the two? Well, the short answer to this question is SWP. When the goal is to have a regular income, with SWP you get more flexible and predictable returns and do not play hide and seek with your money. On the other hand, dividends in a dividend plan depend on the mutual fund’s performance. Investors receive regular cash flows at predetermined intervals which are unaffected by market conditions. SWPs also allow your investments to grow even though they are redeemed at regular intervals while providing tax benefits too. So even if the traditional investor in you is nudging you towards the word dividends, reign it in as SWPs are a better option compared to dividend plans.
SWPs and Dividend plans both provide regular income and are dynamic investment options catering to different categories of investors. However, an investment portfolio in a healthy combination of SWPs and dividend plans can offset the limitations of each option and increase the overall returns for the investor.
In a dividend plan, the declaration and payment of dividends reduce the mutual fund’s net asset value (NAV) by the amount of dividends distributed, resulting in a corresponding decrease in the NAV per unit held by investors.
The target investors for SWPs are usually retirees who need a regular income stream to cover living expenses during their post-retirement phase without depleting their entire investment and also have a lower risk appetite. On the other hand, dividend plans are suitable for investors with moderate risk appetite and investors with a long-term investment horizon.
SWPs (Systematic Withdrawal Plans) are taxed based on the type of mutual fund and holding period. For equity funds, STCG on SWPs is taxed at 15% and LTCG is taxed at 10% on gains exceeding Rs 1,00,000. For debt funds, STCG on SWPs is taxed at applicable slab rates.
Yes, SWPs provide the flexibility to stop them at the discretion of investors and modify them as well.