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Which is better – Mutual Funds Dividend Option Or SWP?

When investing in mutual funds, you have to decide between growth or dividend option. In the dividend add back option, you can either allow your capital to grow as per the stock market’s movement or consider taking the dividend payout option to get a dividend when the mutual fund scheme has distributable profits. The growth option works similarly to the dividend add-back feature. Initially, investors chose the dividend option to get a regular payout from their mutual fund scheme. However, in the dividend option, there is a risk of capital decline if the dividends are paid without distributable profits. Moreover, changes in Budget 2020 made dividends taxable. But you can still get regular income from your mutual funds by opting for an SWP under the growth option.

Here is everything you need to know about mutual funds dividend option and SWP:

What is a dividend option in mutual funds?

When you opt for a dividend payout option in mutual funds, the asset management company (AMC) gives you dividend payouts at different intervals depending on the appreciation of the investments. Mutual fund schemes, specifically the fund manager, decide the frequency of dividend payouts – daily, monthly, quarterly, or annually. However, there is no guarantee of dividend payout. The dividend is paid from the surplus of the scheme. If the principal investment is reduced, the mutual fund scheme does not pay dividends to protect the capital. Further, dividend payments attract a dividend distribution tax (DDT) – 10% for equity schemes and 25% for debt mutual funds, excluding surcharge and cess.

The NAV (Net Asset Value) of the mutual fund is reduced by the dividend amount paid and DDT.

What is the SWP option in mutual funds?

An SWP option is another medium to get regular payouts from your mutual fund scheme. SWP (Systematic Withdrawal Plan) function contrary to a SIP (Systematic Investment Plan). In a SIP, you invest consistently over a period, whereas in an SWP, you invest a lump sum in the mutual fund scheme and take a pre-agreed amount on a pre-defined interval.

Withdrawals made from equity mutual fund schemes within one year and withdrawals made from debt mutual funds within three years are short-term capital gains (STCG). SWP beyond this period is long-term capital gains (LTCG). In LTCG, earnings up to Rs. 1 lakh are exempt, whereas equity gains beyond Rs. 1 lakh are taxed at 10%. Debt LTCG tax is 20%.

Which is better – dividend or SWP?

Read this table to understand which option is better between dividend and SWP:

Basis of Difference Dividend Mutual Fund SWP
Guarantee of withdrawal No guarantee of withdrawals as the dividends depend on the performance of the mutual fund scheme. Payouts are guaranteed. You can withdraw the sum you need.
Cash flow No control over the payouts. Dividends are paid irrespective of their need. You control the payouts. You can start and stop the SWP as per your need.
Portfolio NAV is lowered, but the mutual fund units are unaffected. NAV is unaffected, but the mutual fund units are reduced.
Taxes The fund house pays the DDT, but there is no capital gains tax. Withdrawals are subject to capital gains depending on the time of holding.


You can choose an option that suits your financial requirements. Use the Tata Capital Moneyfy app to invest, monitor, and manage your mutual fund schemes.

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