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[Read: Should Senior Citizens Switch To A Dividend Option From Growth Option In Mutual Funds?]

A dividend income basically refers to a part of company's earnings in form of extra profits or surplus income a corporate or mutual fund house shares with the investors in proportion to the number of stocks or units held.

Consider that you have chosen the dividend pay-out option of a popular fund from a reputed fund house on Dec 2015 with an investment amount of Rs 5 lakhs. Every year after Jan 2016, you would get paid dividends declared by the fund house.

The following table shows the impact of dividends declared on NAV and the changes in investment amount over the past four years.

Table 1: Impact of yearly dividends paid out

Date	Nav (Rs)	Investment Amount (Rs)	No of Units Held	Investment value before dividend (Rs)	Dividend Per Unit (Rs)	Drop in NAV Post Dividend (Rs)	Final Investment Value Post Dividend (Rs)
15-Dec-15	20.89	500,000	23934.9	500,000	0	20.89	500,000
15-Jan-16	20.15	500,000	23934.9	482,288	1.6	18.55	443,992
20-Jan-17	21.87	500,000	23934.9	523,456	2	19.87	475,586
19-Jan-18	26.22	500,000	23934.9	627,573	3.15	23.07	552,178
21-Jan-19	20.24	500,000	23934.9	484,442	1.7	18.54	443,753

(Note: The above table is for illustration purpose only)(Source: PersonalFN Research)

One can observe the drop in NAV and the investment amount after the dividends have been paid. Besides on a yearly basis, the dividend paid is inconsistent and is not at a fixed rate.

Some points to note from the illustration:

• Mutual fund houses and their schemes do not guarantee regular dividends.

• Declaring dividends is at the discretion of the fund house and based on the performance of a respective scheme.

• Frequent dividend declaration by a mutual fund scheme is in no way an indicator of the scheme's performance.

• The dividend-adjusted return is nowhere close to the returns clocked under the Growth Option.

Plus, dividends are often touted to be a benefit because it is tax-free income in the hands of investors; however, a dividend distribution tax is applicable. In case of an equity-oriented mutual fund scheme, the dividend declared is subject to a 10% Dividend Distribution Tax (DDT) as per the current tax laws. This, therefore, brings the Dividend Option and Growth Option almost on par with each other.

And for debt mutual funds DDT is at the rate of 25 per cent (29.12 per cent including surcharge and cess).

However, dividend pay-outs will get in the way of compounding that can help in wealth accumulation under the growth option. But since you are looking to invest when you are about to retire, a Systematic Withdrawal Plan (SWP) is better.

[Read: Systematic Withdrawal Plan - The Ideal Option For Your Retirement Needs?]

Through a systematic withdrawal plan, you can make regular withdrawals (say monthly, quarterly, half-yearly and annually) of a fixed amount and continue to stay invested over a period to clock returns on your remaining amount. The returns from such funds may help you cope with the inflation during your retirement years so that the value of your retirement corpus does not diminish in value.

It not only provides you with a fixed source of income, it inculcates a disciplined approach to spending too. Rupee-cost averaging would work in your favour when you withdraw systematically.

For example, if you get a gratuity of Rs 5 lakhs, you invest in a popular fund under SWP, and monthly you withdraw Rs 10,000 for your expenses.

Table 2: Rupee-cost averaging

Month	Cashflows (Rs)	NAV(Rs)	Fund Units	Value (Rs)
Jul	5,00,000	100	5,000	5,00,000
Aug	-10,000	103	4,903	5,05,000
Sept	-10,000	102	4,805	4,90,097
Oct	-10,000	105	4,710	4,94,511
Nov	-10,000	108	4,617	4,98,641
Dec	-10,000	106	4,523	4,79,407

Note: The above table is for illustration purpose only
(Source: PersonalFN Research)

In the first month when you withdraw Rs 10,000 under SWP, your holdings will decline to 4900 units (i.e. Rs10000 / Rs100 NAV = 100 units are reduced from initial holdings).Now the NAV of the fund has appreciated to Rs 101 due to market dynamics. The number of units equivalent to Rs 10,000 i.e. only 99 units would be sold (i.e. Rs 10000/ Rs 101 NAV = 99 units).

In the next five months, if you withdraw a total of Rs 50,000, your effective portfolio value would be Rs 4,50,000 lakh. However, if you notice the total value is Rs 4,79,407 lakh under SWP, effectively proving it is a better-earning instrument vis-a-vis traditional fixed deposits due to market dynamics.

[Read: 3 Reasons Why A Smart Investor Should Opt For SWP]

Conclusion:

So, keep in mind that there isn't a set schedule for the payment of dividends, nor are the dividend rates predictable. If a mutual fund scheme falters as a result of the negative undercurrents, dividends may be hindered consequently.

Thus, SWP takes care of two things; one it gives you a steady flow of income; second, it does not burden you with a lump sum amount at your disposal. Hence to address your cash-flow needs during retirement, consider the Systematic Withdrawal Plan.

But before you opt for SWP, ensure that for your golden years of rich retirement you have invested wisely with a financial plan during your youth.

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