- What is Dividend Yield Mutual Fund?
- Best Dividend Paying Mutual Funds 2023
- Categories of Monthly Dividend Paying Mutual Fund
- Features of Monthly Dividend Paying Mutual Fund
- How Do Monthly Dividend Paying Mutual Fund Dividends Work?
- Advantages of Investing in Dividend Yielding Mutual Funds
- Limitations of Investing in a Dividend Yielding Mutual Funds
- Who Should Invest in Monthly Dividend Paying Mutual Funds?
- Tax On Dividend Paying Mutual Funds
- Frequently Asked Questions
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 is Dividend Yield Mutual Fund?
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 plan is where the customer can reinvest the dividend in the same fund or any other fund of the same fund house.
Best Dividend Paying Mutual Funds 2023
|Fund Name||Category||3 Year Return|
|Templeton India Equity Income Fund||Diversified Equity||23.9%|
|UTI Dividend Yield Fund||Diversified Equity||19.8%|
|Aditya Birla Sun Life Dividend Yield Fund||Diversified Equity||19.8%|
|ICICI Prudential Dividend Yield Equity Fund||Diversified Equity||23.5%|
|HSBC Dividend Yield Fund||Diversified Equity||3.5%|
|IDBI Dividend Yield Fund||Diversified Equity||18%|
Categories of Monthly Dividend Paying 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 Equity Mutual Funds
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 Debt Mutual Funds
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.
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Features of Monthly Dividend Paying 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.
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How Do Monthly Dividend Paying Mutual Fund Dividends Work?
Mutual funds offer dividends to investors on a regular basis. These payouts ensure regular income for the investors. Thus, dividend-paying mutual funds are popular among investors looking for regular income. Dividends are paid from the revenues generated by the fund in the previous year.
The NAV growth from dividend-paying mutual funds is usually lower when compared to growth funds. This is because investors receive regular dividend payouts.
The asset management company pays a dividend distribution tax (DDT) of 28.84% (inclusive of Cess and Surcharge) in the case of debt mutual funds. For equity mutual funds, there is no DDT.
Advantages of Investing in Dividend Yielding Mutual Funds
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.
Limitations of Investing in a Dividend Yielding Mutual Funds
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.
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 Monthly Dividend Paying 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. Also, 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.
Tax On Dividend Paying Mutual Funds
Dividends are taxable in the hands of the investor. The dividend income is added to the total taxable income and is taxed as per the individual’s income tax slab rate. However, if the dividend payout is more than INR 5,000, a TDS of 10% is deducted.
The capital gains from mutual funds are taxed based on the type of investment and its holding period.
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.
Frequently Asked Questions
In growth mutual funds, the profits made by the mutual fund are reinvested into the fund. On the other hand, dividend mutual funds pay out dividends to investors on a regular basis.
The dividend income gets added to your total taxable income and is taxed at the applicable slab rate.
The frequency of dividend payments is up to the fund house. It can be monthly, quarterly, semi-annually or annually. Also, some mutual funds pay a special dividend, which is other than the planned dividend.
No. Regular dividend paying mutual funds do not have any lock in period. However, tax saving dividend mutual funds have a mandatory lock in period of three years.
Dividend mutual funds offer both SIP and lumpsum investing options.
Yes, non-resident investors can invest in dividend paying mutual funds.
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