Dividend Option and
Systematic Withdrawal Plan in Mutual Funds.
In Dividend
Option the profits made by a scheme are distributed to investors at regular
intervals as dividends. SEBI stipulates that dividends can be paid from accumulated
profits. Investors should note that, as per SEBI regulations, only realized
profits (when portfolio securities are sold at profit) are eligible to be
distributed as dividends. Fund managers may not pay the entire profit realized
by the scheme during a particular period as dividends. They may retain certain
amount of profits in the accumulated profits reserve, so that they can
continue to make dividend payments during rainy days (periods in which the
scheme does not make profits). It is important for investors to note the
following with regards to dividend options :-
· Mutual fund
dividends are not assured. They are paid at the discretion of the fund manager
/ AMC. Schemes which were paying regular dividends can stop paying dividends
for an indefinite period of time.
· Mutual fund schemes
can reduce or increase dividend payout rate at their discretion – depending on
market conditions and outlook.
· There is no fixed
day of a month for monthly dividend payments. The AMC decides the day on which
dividend will be paid in a particular month or quarter.
· The dividend paid
per unit will be stripped from the NAV of the scheme and ex-dividend NAV of the
scheme will be net of dividend pay-out.
· Mutual fund
dividends are tax free in the hands of the investors, but the AMC has to
pay dividend distribution tax (DDT) before paying dividends. The DDT
rate is 28.84% for debt mutual funds. In 2018 Budget, the Government
introduced 10% DDT for equity or equity oriented mutual funds (prior to FY
2019, dividends paid by equity funds were tax free)
What is SWP or Systematic
Withdrawal Plan?
SWP is an
investment option offered by mutual funds, whereby investors can draw a fixed
amount every month (or any other interval as specified by the AMC) from a
mutual fund scheme on a fixed day of any month (or any other interval).
The AMC makes SWP
payments to investors by redeeming the required number of units at prevailing
NAVs; the balance units remain invested and grow in value with growth in scheme
NAV. You can think of SWP as a series of redemptions from your lump sum
investment to meet your cash-flow needs. SWP facility
registration offers
investors the convenience of the AMC taking care of the redemptions on an
on-going basis.
The biggest
advantage of SWP versus dividend option is assurance of fixed cash-flows as
long as there is sufficient unit balance. Investors opting for SWP should note
the following:-
· Cash-flows will be
generated for you by redeeming units of scheme where you have invested. Your
unit balance will go down over time.
· If you want more
cash-flows, higher number of units will have to be redeemed and your unit
balance will be lower and vice versa. You should choose your withdrawal rate
carefully.
· You will continue
to receive fixed SWP payments irrespective of market conditions, but you should
remember that in bear markets more units will have to be redeemed to meet your
SWP payments.
Sources:
Various publications
Disclaimer:
The information provided herein is based on publicly available information and
other sources believed to be reliable, but involve uncertainties that could
cause actual events to differ materially from those expressed or implied in
such statements. The document is given for general and information purpose and
is neither an investment advice nor an offer to sell nor a solicitation. While
due care has been exercised while preparing this document, we do not warrant
the completeness or accuracy of the information. We will not accept any
liability arising from the use of this material. The recipient of this material
should rely on their investigations and take their own professional advice.
"Your Trust, Our
Financial Expertise."
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