SWP vs IDCW in mutual funds: Key points to know for regular income after retirement

For individuals who are retiring or are on the verge of retirement, it is common to contemplate ways to generate regular incomes, either by investing a lump sum or by optimising their existing investments into various instruments. Mutual funds offer two popular ways to do so: one, by setting up a systematic withdrawal plan; and two, by opting for the IDCW plans.

SWP allows investors to make periodic withdrawals at a rate and frequency predetermined by them. In contrast, under the income distribution cum capital withdrawal (IDCW) plan, the fund house distributes money to investors out of the distributable surplus, including dividends, interest, and realised capital gains. IDCW may also involve a return of capital.

Like dividend income from stocks, IDCW plans also promise a form of regular income. But are they better than SWP for regular income? This article compares the two on the following parameters to help you decide.

Wealth growth

Under SWP, investors generally withdraw a small portion of their invested corpus periodically to meet day-to-day needs. The remaining corpus stays invested, generating returns based on the scheme's performance. The return so generated helps fund your systematic withdrawal.

Under IDCW plans, mutual funds distribute dividends as a portion of the invested corpus among investors. Usually, dividends under IDCW plans are announced on a per-unit holding basis. The dividend payout under the IDCW option reduces the net asset value (NAV) of the scheme, which in turn decreases your overall corpus.

Tax-efficiency

Under ICW plans, the dividends distributed by the mutual funds are taxed as per the individual income tax slab rate. For individuals in a higher tax bracket, the tax burden can increase due to IDCW payouts.

Control

Under SWP, you have full control over the amount you want to withdraw or the frequency of such withdrawal. You can tweak both the amount and frequencies based on your needs. However, this much control is not possible under IDCW plans.

The payouts under IDCW are at the discretion of the fund house. They decide when they want to distribute dividends.

Consistency

SWPs offer more consistency as investors have the freedom to set both the amount and frequency. You can rely on a steady cash flow through an SWP, provided you set it up in a way that your corpus doesn't get depleted too quickly.

However, you can not rely on an IDCW plan for a consistent cash flow, as the income distribution call can only be taken by the fund house. However, IDCW may be a good option for investors who want to make use of income distribution for various reasons.