Dividend Paying Mutual funds as a substitute for regular Income
Dividend paying mutual funds are my favorite. if you seek a substitute of fixed deposit then there is no option other than mutual funds. In the investment, you can expect returns in two ways, either you would like a capital appreciation or regular income on your investment which is given to you in the form of a dividend or interest.
If you want to earn a regular income,then dividend mutual funds can meet your needs.
But if you want to buy dividend income then why not invest in direct stock?
By investing in direct stock, you can earn dividend income, but before buying a dividend paying stock, you will need to know well what the company’s liquid position is, and how much the company is able to give a consistent dividend.
Identification of a good dividend paying stocks requires digging into a financial statement. Not many people have time and know-how to do it. A mutual fund is the most reliable alternative to direct stocks investment. Equity-linked dividend paying mutual funds invests directly in stocks.
An objective of dividend paying mutual fund is to maximize the dividend yield for investors.
What is Dividend Yield of Mutual fund….
Suppose a company x which has a market price of 20$ per share and decided to distribute a dividend of 2$ per share, so the dividend yield will be 10%.
If the company is giving consistently dividend yield above 3%, then it can be considered as a reasonable investment. The investor should always keep in mind that only Blue-Chip Company whose financial fundamentals are strong can give a consistent dividend. mutual fund company distributes dividends among to its unitholders from the profit it makes in the redemption of shares.
An investor who invests in dividend paying funds, no need to worry about which stock they should purchase and which stocks need to sell.
The fund manager who is managing the fund it is his responsibility to maximize the returns and dividend yield on investment.
Where should we go – dividend option or growth …
Nav of the dividend paying mutual funds does not increase over time, as in the case of growth option increases. However as mutual fund distributes a dividend, NAV of that fund subsequently decreases. A dividend that is distributed it comes from profit which fund has made over the last year. Say if Nav of the fund increases to 12 Rs from 10 Rs in given period. And if fund manager will distribute the dividend 1 Rs per unit so NAV of the fund will come to 11 Rs per unit.
Therefore, the dividend option is for those people who want regular income as dividends in the short period. Rather, if you want to accumulate money in the Longer term, then the Growth option is right for you. A non-dividend paying Mutual fund will instead use their booked-profits to buy additional value stocks/assets. A non-dividend paying fund can give higher capital appreciation benefits, While dividend fund can give higher short-term income.
Dividend earnings from the Mutual fund are….
Dividend earning from the equity-linked mutual fund is
not taxable specified under section 10(23D) (As per the proposed budget 2018 now it is taxable at the rate of 10%. You can refer the detailed article Budget 2018: 10% dividend distribution tax on equity mutual funds proposed.
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.
Top 10 Dividend paying Mutual funds to invest …
At last, we can say that dividend fund can be a good substitute for regular income. If you are seeking an alternative for a fixed deposit then, a dividend paying mutual fund can be a good choice for the longer term. with you can expect capital appreciation on your principal amount.
The value investors will prefer these best dividend paying Mutual funds over other funds. The reason being short-term income as dividend and also capital appreciation.
Investors who wish to start the process of investing through value investing route may well consider investing in the best dividend paying mutual funds as their starting point.