Rating:

Dividend paying mutual funds are my favorite. I like them because it can generate short term income. Dividend income from equity linked funds may not be as predictable as debt funds. But better option will be to buy equity linked, dividend yielding mutual funds. When it comes to dividend income generation from direct stocks, it is not easy. Identification of a good dividend paying stocks requires digging into financial statement. Not many people has time and energy to do it. Mutual fund is the most reliable alternative to direct stocks investment. Equity linked dividend paying mutual funds invests in direct equity (stocks). Objective of dividend paying mutual fund is to maximize the dividend yield for investors.

Dividend Yield of Mutual Fund

Suppose a company X which has market price of $20 per share. The company decided to distribute $2 per share as dividend. In this case the dividend yield will be 10%. By a rule of thumb, any dividend yield above 3.5% can be considered as reasonable. Investors must keep this in mind that only blue chip companies (companies with strong fundamentals) can pay consistently high dividends. Mutual Fund distributes dividends among its unit-holders from the profit it makes on redemption. Dividend paying mutual funds shares its profits on regular basis with its unit-holders.

Dividend Mutual Funds are not for growth investors

NAV of Dividend paying mutual funds does not appreciate much over time. People who think that they will gain dual advantage from dividend yielding funds is not true. Capital appreciation does not happen much in dividend yielding funds. It generates decent short term income in form of dividends. But capital appreciation is compromised to pay regular dividend to unit holders. Mutual fund that has dividend plan, distributes dividends from profit they make. Hence as soon as dividend is paid, NAV of funds fall. A non-dividend paying fund, will instead use their booked-profits to buy additional value stocks/assets. A non-dividend paying fund can give higher capital appreciation benefits. A dividend fund can give higher short term income.

How dividend is paid by Mutual Funds…

Growth linked mutual funds invests with objective of capital appreciation. Dividend linked mutual funds invests with objective of dividend payment. The dividend is paid from the profit made by the fund in last one year (say). If there is no profit there will be no dividend disbursement. Dividend can be credited directly to investors bank account. For this the investors must select the ‘dividend payout’ option instead of ‘dividend reinvest’ option. In case of dividend reinvest option (growth), the reinvested amount is used to buy more units at prevailing NAV. In this case the investor will see the number of units growing. But there will be no cash-flow.

Are dividend earnings from mutual fund taxable…

Dividend earning from equity linked mutual fund is not taxable specified under section 10(23D). To know whether a fund is equity linked or debt linked, one must know its portfolio composition. If weightage of equity in portfolio more than 65%, the fund is equity linked.

Are dividend yield from equity linked mutual funds assured…

Dividend earning from mutual funds is not assured. If mutual fund NAV has appreciated, only then fund managers will decided to distribute profits. Hence, in case of bullish market, one may fund that dividend payout is more predictable.

Dividend funds yields higher returns or growth funds…

In long term, returns of both funds will be similar. In dividend payout option, money is credited to investors bank account. To further increase the returns, investor must re-invest this money. It is very important to keep this cash rolling.