Dividend Mutual Funds – Do mutual funds pay dividends?

Mutual fund investment is one of the best ways to build a corpus for your long-term financial goals. But have you heard of dividend mutual funds? Before you plan to invest in it, let’s understand more about it in detail.

Getting started with Dividend Mutual Funds

Dividend mutual fund is a stock mutual fund, which invests in companies that pay dividends. These dividends are part of the profits which a company distributes among its shareholders/stockholders. The distribution of dividend mutual funds takes place so as investors can extract maximum value from in a short investment horizon.

Features of Dividend Mutual Fund:

• This type of fund invests 65% of the assets in debt funds and remaining funds equities, as per the guideline set by the Securities and Exchange Board of India (SEBI)

• Mostly the government-backed and private sector companies share the dividend among investors.

• Dividend mutual funds invest only in those companies that are most likely to share a large part of their profits with investors

• The companies that release the profits have an option to either reinvest the net profit or share it equally with shareholders

A dividend mutual fund is an ideal investment option if:

• Look for a regular source of income:

  Many experts suggest that dividend mutual fund can be a good source of income as you can use the income to buy more mutual fund units. Once you invest in it, you can rest assured that you will receive steady and reliable payments.

• You have a low-risk appetite

  Often, dividend mutual fund is compared with growth mutual fund and is a low-risk investment that offers valuable returns. Hence, if you’re a risk-averse investor, then you can go ahead with dividend mutual fund units.

• You are an amateur investor:

  Whether you’re a less experienced investor or a first-time investor or a retired person who is keen on mutual fund investment, then dividend mutual fund is an apt choice. The primary reason being, it poses minimum investment risk as against other stocks.

Advantages of investing in Dividend Mutual Funds:

• Higher returns in shorter-term

• Marginal level of risks

• High tax-exemption threshold

• Multiple offers allow you to pick the right mutual fund

There are two ways to invest in Dividend Mutual Funds - Online and Offline

Offline Investment:

• Visit a broker or directly approach the Asset Management Company of your choice

• Make sure you keep these documents in handy – PAN card, Aadhar Card, Cancelled Cheque, Passport size photos, KYC documents as it is a primary requisite to start the investment

Online Investment:

• Visit the website of Asset Management Companies (AMCs) or any aggregator website that offers all mutual fund types in a single place

• Do your research by comparing various dividend mutual funds to get the best deal

• Select the one which is suitable for you

• Estimate the future value of your investment

• Start investing

Recently, when the Finance Minister of India presented the 2019 budget, she announced that the Dividend Distribution Tax (DDT) on dividend mutual funds would be abolished. Earlier companies had to pay DDT before offering dividends; however, now the part of profits are taxed at the hands of shareholders. As per the new regulations, the fund house has to pay a DDT of 29.12% on debt funds including surcharge and Cess. In the case of equity mutual funds, the DDT is 11.64%, inclusive of Cess.

Key points to remember before you invest in Dividend Mutual Funds:

• A high dividend payout indicates that the company does not have any growth opportunities

• As an investor, you should not consider dividend-yielding mutual funds to churn a fixed amount

• Dividends are subject to Dividend Distribution Tax, which the investors/shareholders have to pay as per the 2019-20 tax slab rates

• Before you plan to invest in these stocks, make sure you know about the company’s consistency of the dividend payout and its growth graph. This will help you a great deal in understanding how the fund would perform in the future

If you’re one of those who have a low-risk appetite and looking for higher returns in short terms, then you can choose to invest in Dividend Mutual. You can either do it online or offline and select invest in the mutual fund depending on your investment goals.