What Are The Best Dividend Paying Mutual Funds?
The best dividend paying mutual funds are investments poured primarily into securities that offer regular dividends/returns/profits/yield. A dividend-paying mutual fund refers to an equity fund or a debt fund that invests primarily in organizations that provide regular dividends. Dividends refer to profits or earnings generated by a company.
Profits are also the returns you get from selling a stock at a higher price than the original buying price of the fund. Investing in debt funds allows you to enjoy predictable returns. Conversely, investing in equity-linked funds can result in highly volatile returns. However, choosing funds that offer regular dividends will allow you to enjoy maximum profitability and superior fund growth.
What Is Dividend Paying Mutual Funds?
Dividend-paying mutual funds are those that provide regular dividends to investors. Fund managers invest their money in securities of companies that offer regular payments.
Mainly the upcoming dividends in mutual funds depend on the strategies used by the fund and its manager, his team of researchers and analysts, who select only those entities aligned with the fund's objectives. However, the forthcoming mutual fund dividends are not guaranteed and are subject to market trends.
How Do Forthcoming Mutual Fund Dividends Work?
Dividend paying mutual funds offer annualized payments to investors, which are made so that you can feel safe with these funds as an investor. These dividends are paid out of the earnings generated by the fund in the previous year.
Dividend paying mutual funds may not show high net asset value (NAV) growth as they pay dividends as soon as they reach a certain level. For debt funds, the fund house must pay a Dividend Distribution Tax (DDT) of 28.84%, which includes customs duties and surcharges. Equity funds do not have to pay any DDT.
Who Should Invest In Dividend Paying Mutual Funds?
Dividend paying mutual funds are ideal for investors who have the following:
- A low-risk tolerance
- First-time-investors
- People who want regular payments as a source of income
- Retired investors who expect a stable and recurring income stream
If you are looking for steady returns, you can consider investing in dividend paying mutual funds. The returns are not large enough, but the low risk and consistency in income cannot be ignored.
Although upcoming dividends in mutual funds are not guaranteed, these funds invest are much more stable and can weather volatile market scenarios. Even when the market is low, the companies pay out some amount as forthcoming mutual fund dividends.
Tax On Dividend Paying Mutual Funds
Until March 31, 2020, dividend income from investment funds was tax-exempt. However, from April 1, 2020, dividend income will be taxed upon withdrawal under the Financial Law (2020). A TDS of 10% is also imposed on dividend distributions above INR 5000.
Following changes made in the 2020 Federal Budget, dividends provided by investment funds are now taxed at the hands of investors by the income tax schedule to which they apply. Capital gains tax rates vary by holding period and type of equity exposure. If the equity portion exceeds 65%, the equity fund taxation rules apply.
Otherwise, tax rules for debt capital funds apply. Therefore, you should be aware of your equity exposure before investing. This allows you to better plan your taxes.
- Long-Term Capital Gains (LTCG) - A 10% tax is levied on redemption gains if shares in the fund have been held for more than 12 months. However, only profits over INR 1,00,000 per year are taxable. Dividends up to INR 1,00,000 are tax-free.
- Short-Term Capital Gains (STCG) - If shares in the fund are held for up to 12 months, the profit tax rate is 15%.
Advantages Of Dividend Paying Mutual Funds
The main benefits of dividend mutual funds are:
- These funds may offer regular upcoming dividends in mutual funds.
- The companies underlying these dividend paying mutual funds are largely immune to market movements.
- These funds have the potential to generate high investment returns over the long term.
- These dividend paying mutual funds reduce market volatility.
- Risk-aversive and first-time investors who seek regular income can consider investing in these dividend paying mutual funds.
Introducing The Best Dividend Paying Mutual Funds
A dividend paying fund is a type of mutual fund that invests primarily in companies that may pay regular dividend payments. As per the standards of the Securities and Exchange Board of India (SEBI), the dividend paying fund invests at least 65% of its portfolio in credible products that can be consistent with returns.
If the fund's equity exposure exceeds 65%, it is known as a dividend paying equity fund. Else it is called a dividend paying debt fund.
Here are the best dividend paying mutual funds:
The table below shows the best dividend paying mutual funds based on the last 3 and 5 years of returns as of October 27 2022:
| Mutual Fund Scheme Name | Features | 3-Year Annualized Returns | 5-Year Annualized Returns |
| ICICI Prudential Dividend Yield Equity Fund – Direct Plan-Growth | NAV: Rs. 30.71 Expense Ratio: 0.81% AUM: INR 1109.27 Cr | 24.12% | 10.85% |
| UTI Dividend mutual funds – Direct Plan-Growth | NAV: INR 108.31 Expense Ratio: 1.49% AUM: INR 2789.48 Cr | 16.83% | 11.36% |
| IDBI Dividend Yield Fund – Direct Plan-Growth | NAV: INR 18.31 Expense Ratio: 1.5% AUM: INR 91.03 Cr | 19.52% | NA |
| Templeton India Equity Income Fund – Direct-Growth | NAV: INR 89.42 Expense Ratio: 1.59% AUM: INR 1254.98 Cr | 23.87% | 13.53% |
| Sundaram Dividend mutual funds – Direct Plan-Growth | NAV: INR 91.29 Expense Ratio: 2% AUM: INR 321.27 Cr | 18.63% | 11.71% |
| Aditya Birla Sun Life Dividend Yield Fund – Direct Plan-Growth | NAV: INR 280.57 Expense Ratio: 1.85% AUM: INR 810.28 Cr | 19.60% | 8.60% |
| HDFC Dividend Mutual Fund – Direct Plan-Growth | NAV: INR 15.51 Expense Ratio: 0.43% AUM: INR 2991.34 Cr | NA | NA |
| Tata Dividend mutual funds – Direct Plan-Growth | NAV: INR 11.54 Expense Ratio: 0.74% AUM: INR 540.41 Cr | NA | NA |
| SBI Bluechip Fund – Regular Plan-Growth | NAV: INR 62.53 Expense Ratio: 1.65% AUM: INR 33021.61 Cr | 10.99% | 14.79% |
| L & T Emerging Businesses Fund | NAV: INR 47.21 Expense Ratio: 1.85% AUM: INR 8406.20 Cr | 28.35% | 12.54% |
Characteristics Of Dividend Paying Mutual Funds
The main characteristics of dividend paying mutual funds are:
Asset Allocation
According to SEBI guidelines, dividend paying mutual funds must invest at least 65% of their assets in equities and equity-based products.
Risk/Reward Ratio
These funds typically deal in equities because their performance is subject to market fluctuations. However, these programs are less volatile than most other equity funds because they invest in the stocks of the best companies.
Regular Source of Income
Dividend mutual funds provide a steady stream of income through equity investments. You can use the money you earn to invest in more mutual fund stocks.
Consider the Following When Investing in Income Mutual Funds:
- Risk Appetite
- Investment purpose
- Fund manager experience
- Expense ratio and exit load
- Regular plan or direct plan
Conclusion
A dividend paying mutual fund is an open-ended fund that invests primarily in equity or debt funds that pay regular upcoming dividends in mutual funds. Fund managers invest in stocks of companies that may make regular payments.
Normally, the income derived from the consistent forthcoming mutual fund dividends earned from these funds can be attributed to the wise strategies used by the fund managers. They choose to invest in the right kind of credible companies that are capable of paying out regular income streams. Also, dividend mutual funds are considered safe investments because of the low risks and regular payments by companies.
Frequently Asked Questions
What amount of my dividend income that I receive from my dividend mutual funds will get taxed?
There is no separate taxation system for the forthcoming mutual fund dividends. Instead, the amount will be added to your annual income and taxed at the applicable income tax rate.
How often do dividend mutual funds pay dividends?
The management decides the frequency of upcoming dividends in mutual funds by dividend mutual funds. It can be based on a monthly, quarterly, or semiannual payout system. A special dividend is a one-time annual dividend paid separately from the planned dividend amount.
Is there a lock-in period for dividend mutual funds?
Generally, dividend mutual funds don't come with any lock-in period, except tax-saving dividend mutual funds, which come with a mandatory lock-up period of 3 years.
What do fund managers do with forthcoming mutual fund dividends?
Fund managers follow the SEBI standards and conduct a thorough market analysis and research, after which they make the necessary changes to your portfolio.
The fund's performance is based on the effectiveness of the manager's decisions. Well-informed fund managers are more likely to achieve the goals set by the program.
What is the expense ratio when investing in dividend mutual funds?
The fund house charges investors an annual management fee to cover administration and operating costs. This fee is called the expense ratio. This fee affects the NAV of the fund, which further affects returns.
What are investment options available in dividend mutual funds?
You can invest in dividend mutual funds using two methods either systematic investment planning (SIP) or lump sum investment planning.