Mr Shah, 59 wanted to plan his income from mutual fund and therefore he was looking for best dividend paying mutual fund on net.
Mr Shah was a well informed investor and he knew that he could get better returns from mutual funds along with regular income.
He initially planned to take dividend from mutual fund. But his Financial Planner warned him not to opt for dividend income from mutual fund.
Mr. Shah was surprised that why his financial Planner was not keen to have dividend from mutual fund.
Table of Contents
So, Let’s explore the probable reason that Why dividend from mutual fund should be avoided:
Reason #1:
People opt dividend option so that they can take regular payout/profit from their money
But unfortunately the purpose is defeated in the beginning itself.
You will be surprised to know that dividend payment time is NOT fixed.
Even if some company may give regular dividend payment to the buyer in whatever market cycle, dividend will be given from your own money rather than profit.
Reason # 2
You will get steady payment in form of dividend.
Mr Shah will not get steady dividend payment if he opts for dividend income option from mutual funds.
Dividend amount always depend on company’s or fund’s profit generated and on company’s decision on how much profit should be shared with the investor.
Reason # 3
Time is not fixed for dividend payment
If Mr Shah opts for dividend income from mutual fund. Dividend is not paid at regular time intervals.
Therefore, he will get dividend money or not is not fixed. Periodicity of dividend payment is never fixed.
Consequently this is the third blow for the investor who invest in dividend option of mutual fund.
Reason # 4
Tax implication of dividend income from Debt Mutual Fund
Mr Shah was happy thinking that dividend income will be tax free in Mr Shah’s hand. Yes, it is true that dividend income is tax free in investor’s hand but the Asset Management Company has to pay tax on this money before paying it to you. ( Beware this tax is paid from your own money )
Say company has made profit of Rs 10000. Entire amount is Rs 10000 should be paid to investor. But this Rs 10000 is first taxed and then paid to the you.
This dividend distribution tax is 28.84% on Debt Mutual Fund. So this amount of Rs 10000 reduces to Rs.7117.
Substantial loss. Isn’t it.
Reason # 5
Tax implication of dividend income from Equity Mutual Fund
Even if Mr Shah opts for dividend from an Equity Mutual Fund even than tax is to paid on equity too.
Say company has made profit of Rs 10000. Entire amount is Rs 10000 which has to be paid to investor is first taxed and then paid to the investor.
This dividend distribution tax is 11.64% on Debt Mutual Fund. So this amount of Rs 10000 reduces to Rs.8836.
Substantial loss again.
These were the top 5 reasons that why you should not opt for dividend option from mutual funds.
Alternative to Dividend income:
Absolutely there should be a way out and alternative of dividend income. So that regular income or the profit from your mutual fund should be taken well in time.
if you require regular income from mutual funds, you can consider SWP ( Systematic withdrawal Plan) from mutual fund.
Conclusion:
Dividend from mutual fund should be avoided because of its taxability and other factors illustrated above.
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