Dividend Mutual Funds: Do Mutual Funds Pay Dividends?

Mutual fund investments are one of the best ways to build a corpus for achieving long-term financial goals. However, among numerous types of Mutual Funds, you can invest in, a Dividend Mutual Fund is an ideal investment to earn good systematic returns. Before you plan to invest in it, let’s understand more about it in detail.

Getting started with Dividend Mutual Funds

A dividend mutual fund invests in the stocks of companies that pay dividends to their investors. These dividends are part of the profits a company distributes among its shareholders/stockholders. The investment in dividend mutual funds takes place so that investors can extract maximum value in a short investment horizon.

Features of a Dividend Mutual Fund

As per the guideline set by the Securities and Exchange Board of India (SEBI), this type of fund invests 65% of the assets in debt funds and the remaining funds in equity. Dividend mutual funds invest in companies most likely to share a large part of their profits with investors as dividends. The companies that distribute the profits have an option to either reinvest the profits earned or share them equally with shareholders. The latter is done by announcing a dividend.

Why buy Dividend Mutual Funds?

A dividend mutual fund is an ideal investment option if:

  • Regular source of income:

    Experts suggest that a 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 receive steady and reliable payments.

  • Low-risk profile:

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

  • Easy Investments

    Whether you’re a less experienced investor or a first-time investor keen on investing in mutual funds, a dividend mutual fund can prove to be an apt choice as it poses a minimum investment risk 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

How to Invest in Dividend Mutual Funds?

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

  • You will need documents such as a PAN card, Aadhar Card, Cancelled Cheque, Passport size photos etc.

Online Investment:

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

  • Do your research by comparing various dividend mutual funds to choose an ideal scheme.

  • Estimate the future value of your investment and start investing.

Dividend Mutual Fund and Taxation

In the 2019 Budget, the Finance Minister announced the abolishment of the Dividend Distribution Tax (DDT) on dividend mutual funds. Earlier, companies had to pay DDT before offering dividends. Now, the part of profits is taxed at shareholders’ hands. 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.

  • You should not consider dividend-yielding mutual funds to churn a fixed amount as an investor.

  • 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 will perform in the future.

Conclusion

If you’re one of those who have a low-risk appetite and looking for higher returns in the short or long term, then you can choose to invest in Dividend Mutual Funds. You can either do it online or offline as per your convenience and select ideal mutual funds that can let you achieve your financial goals.

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