 "Retirement income: SWP vs Dividend Plans - which is the smarter choice?")
Ensuring a source of regular income after retirement should be a significant financial target for salaried individuals. Expenses continue even after the salary stops, and fulfilling needs without financial pressure while enjoying life is everyone’s dream. In such a scenario, mutual fund Systematic Withdrawal Plans (SWP) and Dividend Plans can be highly effective options for retirement planning.
With SWP, you can withdraw a fixed amount from your mutual fund investments at regular intervals, ensuring regular income. On the other hand, Dividend Plans provide income periodically in the form of dividends. However, there are several fundamental differences between these two plans. If you are planning to ensure regular income after retirement, it is essential to understand which option is more beneficial based on your needs.
Top 5 Retirement Funds Delivered 11–16 per cent Returns in 3 Years
Talking about the performance of retirement funds, the top 5 retirement funds have delivered average returns of 11–16 per cent to investors over the past three years. Among these, ICICI Prudential Retirement Fund – Pure Equity Scheme delivered the highest return of 16.32 per cent.
If someone had invested Rs 100,000 in this scheme three years ago, the investment would now be worth approximately Rs 157,385, yielding a profit of Rs 57,385.
Here’s a mutual fund calculation to understand the value of a Rs 100,000 lump sum investment made three years ago in these top 5 retirement funds:
| Retirement funds | 3 year Return (%) | Total Value (in Rs) |
| ICICI Prudential Retirement Fund – Pure Equity Plan | 16.32 | 157,385 |
| HDFC Retirement Savings Fund – Equity Plan | 16.03 | 156,211 |
| ICICI Prudential Retirement Fund – Hybrid Aggressive Plan | 13.82 | 147,454 |
| Nippon India Retirement Fund – Wealth Creation Scheme | 13.27 | 145,326 |
| HDFC Retirement Savings Fund – Hybrid Equity Plan | 11.97 | 140,380 |
Source: AMFI (Based on NAV as of 13-Jan-2025)
Imagine this scenario: You start investing Rs 10,000 per month in a retirement fund through a Systematic Investment Plan (SIP) at the age of 30. Assuming an annual return of 12 per cent from the retirement fund, you retire at the age of 60. By the time you retire, your corpus would have grown to approximately Rs 3.53 crore.
Out of this, your total investment would be Rs 36 lakh, while the rest would come from the power of compounding. At the time of retirement, you would have a substantial corpus that could be withdrawn as a lump sum or through regular intervals.
If your goal is to ensure a steady flow of income post-retirement, utilizing this corpus through a Systematic Withdrawal Plan (SWP) would be a better strategy. This method allows you to withdraw a fixed amount regularly, ensuring a stable income while keeping the remaining investment growing.
What is a Systematic Withdrawal Plan (SWP)?
A Systematic Withdrawal Plan (SWP) is an option in mutual fund investments that allows investors to withdraw a fixed amount from their corpus at regular intervals. This amount can be withdrawn monthly, quarterly, or annually, depending on the investor’s preference.
Investors can choose a specific date for the withdrawal-be it a month, quarter, or year-and the amount is credited directly to their bank account by the AMC (Asset Management Company).
An investor also has the option to withdraw only the gains (profits) from their investment, ensuring that the principal amount remains intact. On the selected date, units from the investor’s portfolio are sold, and the withdrawal amount is transferred to their account.
Investors can continue using the SWP option as long as they have sufficient units remaining in their portfolio.
However, many investors who require regular income even before retirement may opt for Dividend Plans, which provide periodic income through dividends.
What is a Dividend Plan?
A Dividend Plan is a type of mutual fund scheme where the fund house (Asset Management Company) distributes the profits earned by the fund among its investors. It is an attractive option for investors who wish to receive regular income from their investments.
The amount and timing of the dividend are not fixed in advance. They depend entirely on the fund's performance, market conditions, and the profits available at that time. If the fund does not generate a profit, no dividend will be paid.
The dividend amount received by investors is determined based on the number of units they hold. This means the more units you own, the higher the dividend you will receive.
Which is Better: Dividend Plan or SWP?
According to Mohit Gang, CFA at Moneyfront, whenever there is a need for regular withdrawals from a mutual fund portfolio, investors should carefully evaluate between Dividend Payout and Systematic Withdrawal Plan (SWP).
In the case of Dividend Payout, investors are taxed according to their tax slab. Therefore, this option is suitable only for investors in the lowest or zero tax slab. Dividend payouts include both the capital invested and the gains, and the entire amount (capital and gains) is subject to tax.
SWP, on the other hand, offers an automated and regular withdrawal facility and is much more tax-efficient. In SWP, only the gains portion of the withdrawal is taxed as capital gains, making it more beneficial for investors.
For example, if an investor receives a dividend of ₹100, this amount is added to their income and taxed according to their tax slab. However, if the same Rs 100 is withdrawn through SWP, only the gains portion within the ₹100 is taxed as capital gains, making SWP more tax-effective.
Akhil Chaturvedi, ED & CBO at Motilal Oswal, states that SWP is a good option for investors who want regular cash income while saving on taxes.
If you are looking for a fixed and regular income, SWP is the right choice. It allows you to decide both the amount and frequency of withdrawals, which can be adjusted based on your needs.
This is especially beneficial during retirement when you need a steady income to meet expenses. With SWP, you can convert your lump sum investment into regular income while also taking advantage of potential market growth.