Flexibility to choose funds, setting up SIP, STP and SWP as per needs, and the ability to generate inflation-adjusted returns have made mutual funds one of the most sought-after investment avenues to accumulate wealth for various life goals. While long-term wealth creation is one of the primary goals of mutual funds, they also help you generate regular income through dividends. Read on to know the various aspects of a dividend pay-out option and examine whether you should opt for it.
What is a Dividend Pay-out?
Any mutual fund scheme, be it debt, equity, or hybrid, can declare dividends for its holders from the realised profits in its portfolio. These profits, earned by the mutual fund schemes, can be distributed to investors either daily, weekly, monthly, quarterly, or annually.
Advantages of Dividend Pay-out :
- Distributing profits
Dividends are a mode to safeguard gains. Markets are cyclical in nature and several factors, external as well as internal, can affect your portfolio and eroding your corpus. When a fund pays out a dividend, you automatically book the profits thereby allowing you to distribute the gains.
- A source of alternate income
By choosing the dividend pay-out option, you are creating a channel of alternate income. While the amount or frequency of dividends is not guaranteed and is subject to availability of distributable surplus, it can help investors with an additional and intermittent cash flows.
Essential things to know:
When dividends are paid, the value of your investment goes down proportionately. For instance, if the value of your investment is Rs. 50,000 and you receive a dividend of Rs. 3,000, your investment value stands at Rs. 47,000. (for illustrative purpose only. Without considering taxes if applicable).
Also, with the imposition of 10% Dividend Distribution Tax (DDT), you do not receive the entire dividend declared. However, dividend is paid to the investors after deducting applicable taxes and so is tax free in the hands of investors, and mutual fund pay the tax on the same.
In order to receive dividends, you need to choose the Dividend Option while investing in a mutual fund. Dividends are usually swept directly into the investor’s registered bank account, by a cheque, or transferred electronically.
Choosing between Dividend and Growth options
Your ‘investment objective’ will prescribe whether you should opt for a Growth or
a Dividend option. If your objective is to create long-term wealth and gain from compounding, you should opt for a Growth option. On the other hand, if you are looking to get intermittent pay-outs and book profits, the Dividend option can be on your pick.
IDFC Mutual Fund gives you the option to invest in Growth and Dividend option based on your needs. Subscribe to our page for more insights on mutual fund investments.