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Sometimes, mutual fund investors prefer an income in the form of a dividend from their investments. This income is useful for any inevitable expenses that may incur or sometimes as regular income as well. This is when the investors opt for dividend mutual funds. Dividend mutual funds are those that invest in stocks that have a good dividend record. 

Here, in this article, we will provide you with a guide on monthly dividend mutual funds along with its features, advantages and disadvantages. 

What are monthly dividend mutual funds?

A mutual fund investor can choose to invest in any two types of mutual funds, i.e. growth-oriented mutual fund or dividend-oriented mutual fund. A growth-oriented mutual fund invests in stocks of companies that have the potential to grow. The main objective of these funds is capital appreciation.

On the other hand, investors can also choose dividend-oriented mutual funds. Dividend-oriented mutual funds invest in stocks that have the potential to pay dividends continuously. These companies produce high earnings for dividends to be declared. Also, the dividend is the profit that the company shares with its shareholders. The profits are realized by selling the stocks at a higher price. However, the asset management company (AMC) adds these profits to the Net Asset Value (NAV) of the fund. The mutual fund pays a dividend monthly, quarterly, half-yearly or yearly. Therefore, the fund manager tries to extract the maximum value out of these investments. 

The dividend-oriented mutual funds are further classified as dividend payout funds or dividend reinvestment funds. The dividend payout option is where the customer receives regular dividend directly in this bank account. On the other hand, dividend reinvestment is where the customer can reinvest the dividend in the same fund or any other fund of the same fund house. 

Categories of monthly dividend mutual fund

The monthly dividend mutual fund can be categorized into two based on their asset allocation, returns and taxation. The following are dividend mutual funds categories.

Dividend Yielding Mutual Funds (Equity)

In the case of dividend yielding mutual funds (equity), the fund manager allocates a major portion of the fund in equity stocks. As per SEBI regulations, an equity mutual fund must invest at least 65% of its assets in equity and equity-related instruments. The primary objective of this fund is to provide capital appreciation over the medium to long term horizon. Furthermore, investing in these funds is considered to be highly volatile. 

Dividend Yielding Mutual Funds (Debt)

In case of dividend yielding mutual fund (debt), the fund manager allocates a major portion of the fund(at least 65%)in debt instruments like bonds issued by the government or corporate, money market instruments, etc. Also, this fund is suitable for investors with low-risk tolerance levels. However, debt mutual funds are often referred to as fixed-income securities as the investor is aware of the returns from these investments. Unlike equity dividend mutual funds, these fixed-income funds are more steady and less volatile. Hence, the dividend of these funds is paid from the income from debt funds.

Features of monthly dividend mutual fund

The following are the features of a monthly dividend mutual fund.

  • Monthly dividend mutual funds are known to invest a significant portion of their corpus in dividend yielding stocks. It implies that these companies pay a regular dividend to its shareholders.
  • As per the SEBI guidelines, these mutual funds must invest at least 65% of their assets in dividend yielding stocks.
  • Monthly dividend mutual funds are known to invest specifically in those companies that distribute their profits amongst their investors. Usually, these companies are government-owned or some private sector companies which regularly pay back to their shareholders in the form of dividends.
  • These companies also have an option to reinvest their profit for the year, or they can distribute the profit to the shareholders.
  • The dividend of these mutual funds can be paid only when the fund manager books profit from its mutual fund holdings. Thus, the mutual fund pays a dividend monthly, quarterly, half-yearly or yearly. 

Advantages of investing in monthly dividend mutual fund

The following are the advantages of investing in a monthly dividend mutual fund.

Steady cash flows 

Investing in a monthly dividend mutual fund is a source of income for many investors. The dividend paying mutual funds are a constant and safe payment to an investor. 

Risk

The dividend paying mutual funds are considered to be less risky in comparison to other funds like equity funds. Also, dividends help to minimize market volatility risk. They act as a hedge in case of market uncertainty. Furthermore, the investment in these funds involves a marginal risk. Thus, it is suitable for investors with any investment horizon or risk tolerance level. 

Returns

Investment in these funds significantly provides an average return in the long run. The reason is, the fund manager usually includes blue chip company stocks in the fund portfolio. Generally, these companies have an excellent financial track record. Also, a stream of continuous dividends indicates that the company is performing well. 

One can use Scripbox’s returns calculator to estimate their mutual fund returns. Similarly, SIP calculator is also available online to calculate SIP returns. 

Limitations of investing in a dividend fund

The following are the limitations of investing in a dividend fund.

Historical data of the company

Dividends are linked to the profits of the company. Investors must choose those monthly dividend mutual funds which invest in profit-making companies. Moreover, it is crucial to check the historical data of dividend declarations of these companies. There are chances that the very high dividend declaration may indicate that the company does not have enough opportunity to expand. Thus, this is a significant factor to consider before investing. 

Tax implication

There are tax implications associated with monthly dividend mutual funds. This can also destroy money because of the tax on dividends. If the dividend income exceeds INR 10 lakhs in a year, it is chargeable in the hands of the individual investor, HUF, partnership firm or private trusts. The current rate for taxation is 10%. These tax deductions reduce the amount of dividend or return that the investors earn from monthly dividend mutual funds. 

Who should invest in dividend mutual funds?

  • Dividend mutual funds are primarily suitable for investors with low-risk tolerance levels. Generally, these investors prefer to let go of better profits rather than exposing themselves to market risks. 
  • Investing in dividend mutual funds helps investors to diversify their portfolio. This fund acts as an all-round investment tool for investors. 
  • Usually, retired investors are looking for regular income from their investments. A monthly dividend mutual fund is the best option for them. 

To conclude, investors can choose either a growth option or dividend option mutual funds based on their investment goals. For People who wish to grow wealth over the long term, growth mutual funds are suitable. However, people who are looking for regular income, dividend mutual funds are suitable for them. 

What are the other fund categories under Debt funds?

Following the other categories under Debt fund:

  • Banking and PSU
  • Corporate Bond fund
  • Credit Risk
  • Dynamic Bond
  • Savings fund
  • Gilt
  • Liquid funds
  • Long Duration
  • Low Duration fund
  • Medium Term
  • Medium to Long Duration
  • Money Market
  • Overnight
  • Short Term
  • Ultra Short term

Frequently Asked Questions

What are the other fund categories under equity funds?

Following the other categories under equity funds:
1. Large Cap Fund
2. Mid Cap Fund
3. Large and Mid Cap Fund
4. Small Cap Fund
5. Multi Cap Fund
6. Value Fund
7. Thematic / Sector Fund
8. Focused Funds
9. Dividend Yield Fund
10. Index fund
11. ELSS fund is also known as tax saver fund
Also, in addition to the equity and debt category, mutual funds have another category called hybrid mutual funds. A hybrid fund invests in both debt and equity instruments. Additionally, one can invest in these funds either through a lump sum or SIP route.