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Dividend Option in Mutual Funds

Mutual funds offer investors two options: a growth plan and a dividend plan. A growth plan aids with wealth creation while a dividend plan can be a good source of income. Mutual fund dividend payments can provide periodic liquidity to retired investors or other income-seeking investors.

What is the dividend option in mutual funds?

A dividend plan in a mutual fund is one in which the profits from investments are distributed to investors in the form of dividends. Dividends may be paid monthly, quarterly, half-yearly or annually. However, frequency of dividend payments is not guaranteed and depends upon the surplus that the fund generates.

One characteristic of the dividend plan is that following a dividend payout, the net asset value of the fund decreases since dividends are paid out of surplus.

What are the benefits of dividend option in mutual funds?

Dividend on mutual funds can provide investors with a steady income and are a great option for those looking for liquidity from their investments. They can also be an alternative to bond funds in market situations where the economy is doing well, but interest rates are still low.

However, for investors who may look to the dividend option for regular income, it is advisable to note that the frequency and amount of dividend payments are not assured.

When are dividends paid?

The fund house or asset management company pays dividends as per its discretion. The disbursements depend upon the fund manager’s decision. Most AMCs try to pay out dividends regularly as per their mandate, but a mutual fund’s dividend payment is never guaranteed. Even amounts vary, depending on the fund’s performance.

After dividends are declared, the fund house has to transfer the money to investors within 30 days, as per SEBI’s mandate.

What are the tax implications on mutual fund dividend?

Dividends shall be taxable in the hands of the investors and the mutual fund will deduct TDS @10% for resident investor and @20%(plus applicable surcharge and cess) for non-resident investor before payouts/re-investment. However, the Investor can claim tax credit of TDS deducted at the time of filing of their annual return.

Should you choose dividend option in in mutual fund investment?

Dividend options are usually popular among risk-averse investors looking for a regular income stream. For those who are aiming at wealth creation, growth-option can be a better option. Given that their tax-free status has now been revoked, for investors looking specifically at a tax break, ELSS funds can be the better tax saving option.

However, for investors in the lower taxation brackets, the revised tax laws can be beneficial because the effective tax rate will be lower than earlier.

Conclusion

Depending on your requirement as an investor, dividend option can be for you. Despite the taxation clause, a dividend payout can take care of liquidity needs. However, before investing, research various kinds of schemes and understand their implications on your financial portfolio.

Next To Come: How to save tax by investing in mutual funds