Off late, there has been an increase of interest in dividend mutual funds. To start investing in mutual funds, click here. Read further to understand dividend funds better.
What Is a Dividend Fund?
A dividend mutual fund is a fund that gives dividends from time to time.
When most people talk of mutual funds, they refer to growth mutual funds, not dividend mutual funds. In fact, awareness about dividend mutual funds is quite low. But gradually, the awareness is rising and more people are asking questions.
In the case of growth mutual funds, whatever investments earn is reinvested. But in the case of dividend mutual funds, the returns may or may not be reinvested. Not just returns from investments, even the dividends earned by the stocks owned by the mutual fund may or may not be given as dividend to investors.
Are Returns and Frequency Guaranteed?
No, returns and frequency are not guaranteed.
The amount to be paid as dividend and the frequency of payment is entirely decided by the fund manager. This depends on the market conditions and the state of investment of the mutual fund.
If the fund manager feels the need to reinvest for the fund’s growth, he may choose to reduce the dividend amount or even skip payment of dividend. Even the frequency of payment can be changed by the fund manager.
Is It Common for Them to Skip a Payment of Dividend?
They usually avoid skipping paying dividends.
It is fairly common to change the dividend amount at every payment. However, entirely skipping a payment is generally avoided as it affects the reputation of the fund manager and the mutual fund.
Even the amount paid out as a dividend does not vary drastically as it could affect the perception of the mutual fund.
How Is Tax Calculated on Dividend Mutual Funds?
Tax in case of dividend mutual funds is a bit tricky.
You do not have to pay any tax upon receiving a dividend. However, the mutual fund has to pay a tax on the dividend. This tax is called dividend distribution tax. The rate of dividend distribution tax is 15%.
Dividend mutual funds are not very tax efficient in that sense and should be avoided as the returns are taxed quite heavily as compared to growth mutual funds.
Who Is a Dividend Mutual Fund Ideal For?
Every mutual fund caters to a specific type of investor.
Dividend mutual funds take longer to show the same results that a growth mutual fund does. However, one major advantage dividend mutual funds have is that they start paying back much quicker. People who are greatly dependent on a sum of money and yet want to mobilize it to earn money can opt for dividend mutual funds.
This way, there is some form of capital protection while still getting regular dividends. They invest their money in a dividend mutual fund and live off the dividends instead of directly eating into their savings.
This offers a certain peace of mind to the investors. Certain investors would trade peace of mind for higher returns and dividend mutual funds suit them best. If you are one such investor, you can consider investing in dividend mutual funds.
Are There Any Other Options That Offer Regular Returns?
You can explore the option of Systematic Withdrawal Plans (SWP).
Systematic Withdrawal Plans let you withdraw a fixed amount at a fixed interval. The biggest difference here is that you can choose the amount and frequency of withdrawal. Also, depending on the type of mutual fund, if carefully planned, you can avoid paying any taxes too.