How mutual funds pay dividends

Most investors who embark upon their portfolio building journey invest in mutual funds, owing to their simple and convenient nature, along with the optimal access to expert fund management at affordable costs. Accordingly, the total assets under management, in the Indian mutual fund industry, stood at INR 46.63 trillion, as of the end of August [1]. When it comes to investing, mutual funds offer a diverse range of options to suit different financial goals and risk appetites, from equity fund, debt funds, and hybrid funds to passive equity funds and passive debt funds. But did you know you can also earn a dividend in mutual funds? Dividend paying mutual funds are favoured by investors seeking regular income, especially if they wish to maximise their gains in a short time period. These schemes invest in the stocks of dividend paying companies and pass on the dividend thus availed to the end customers or investors like yourself.

[1] https://www.amfiindia.com/indian-mutual

Features of a dividend mutual fund

Before diving into the mechanics of how a dividend in mutual funds works, let us understand the key features of a dividend mutual fund. According to the Securities and Exchange Board of India (SEBI), dividend funds typically invest at least 65% of their assets in debt funds, while allocating the remainder of their capital to stocks. The profit earned from the equity portion is shared equally with the investors, in the form of dividends. Unlike growth funds that reinvest their profits back into the fund, dividend funds distribute earnings periodically, typically on a monthly, quarterly, or annual basis. For investors keen on a regular income from their investment, monthly dividend mutual funds can be a great option. The amount of dividend income you receive can vary based on the fund's performance and the dividends received from its underlying holdings. You must remember that the same is not fixed, like an interest rate on a savings account. In terms of management, these schemes are headed by professional fund managers who make investment decisions based on the fund's objectives and market conditions.

Why buy dividend mutual funds?

Now that you understand the concept of dividend in mutual funds, why should you make these a part of your portfolio? Investors opt for dividend mutual funds for several reasons, with the single most common factor being its ability to unlock a regular source of income. These funds provide a steady stream of income, making them attractive to retirees or those seeking supplementary income. Secondly, fund managers heading such schemes use their expertise to select the best income-generating securities, potentially providing higher returns than an individual investor might achieve. Mutual funds are also easy to buy and sell, and they offer liquidity that can be lacking in certain other income-generating investments, making it a solid option for investors looking for income generation in the short-term.

Advantages of investing in dividend mutual funds

The best dividend paying mutual funds offer a plethora of advantages to investors, starting with a regular income and diversification, since these funds typically hold a portfolio of dividend-paying assets, thereby spreading risk across various industries. Further, given the regular dividend payout, these schemes offer investors higher returns in the shorter-term. This aspect also contributes to its comparatively low risk nature since you are receiving returns right from the outset, rather than merely at the end of the tenure. Many dividend funds also have a high tax-exemption threshold, making it attractive to investors keen on curtailing their tax outflow. Finally, the multiple options available in the industry ensure that you can choose the scheme which is just right for you.

How to invest in dividend mutual funds?

You can invest in dividend mutual funds through both the online and offline routes. In the former, you can visit the chosen mutual fund company’s website, or an online platform which offers investment support and pick the scheme that is best aligned with your requirements. Following this, you can estimate the value you wish to attain during your time horizon and start investing. Separately, you can visit a broker or approach the mutual fund house physically and start investing by submitting your KYC data.

Dividend mutual fund and taxation

Since 2019, the Dividend Distribution Tax (DDT) on dividend mutual funds has been rescinded, meaning that the profits will be taxed at your end, after you receive the dividend. Accordingly, the asset management company is required to pay DDT of 29.12% on debt funds, and 11.64% on equity schemes.

Key points to remember

A high dividend payout from a company can often be a sign that it may not have significant growth opportunities, as it is distributing a substantial portion of its profits to shareholders rather than reinvesting in expansion. While dividend-yielding mutual funds can provide regular income, investors should not expect a fixed amount as dividends can vary. Additionally, you should be aware that the DDT you pay will be based on your prevailing tax slab rates.

Whether you are planning for retirement or seeking supplementary income, dividend mutual funds can be a valuable addition to your portfolio. Do you think this is the right time to consider this option?

An investor education initiative by Edelweiss Mutual Fund

All Mutual Fund Investors have to go through a one-time KYC process. Investors should deal only with Registered Mutual Fund (RMF). For more info on KYC, RMF and procedure to lodge/redress any complaints, visit - https://www.edelweissmf.com/kyc-norms   

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS. READ ALL SCHEME-RELATED DOCUMENTS CAREFULLY