If you are looking for mutual fund investments that can help you meet your planned and unplanned financial needs or to bridge your income shortfalls, you can invest in dividend-paying mutual funds. Mutual funds can help you generate additional income that can be added to your current income. Here’s how:
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Dividend-paying mutual funds allow investors to set up a steady source of income with regular payouts. The payouts are made on a regular basis and thus investors can choose to reinvest the dividends if they want to strengthen their portfolios.
When you choose an equity-linked fund, you expose your investments to equity-linked volatility. But when you invest in equity-linked funds that offer dividend payout, you can enjoy maximum profitability along with the exceptional growth of your funds. These funds are ideal for investors who wish to receive regular payments while keeping the risk factor low. These companies are known to generate high profits that allow them to reward the shareholders through dividend payment. Thus these companies have a proven track record of declaring profits.
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However, you must understand that the NAV of these funds does not show high growth as the dividend payment itself leads to a fall in the prices of the shares. So before investing you must conduct a thorough search and evaluate the track record of the dividend mutual fund scheme under the following parameters:
Before investing in dividend mutual funds, you must understand the options available with you. You can invest in the following categories of dividend-paying mutual funds. They are:
Debt Dividend Mutual Funds: In this case, a mutual fund scheme mainly invests in fixed income instruments like government and corporate bonds, money market instruments and debt securities. These are ideal options if you are a risk-averse investor. These funds allow you to receive fixed returns right from the beginning and offers significant tax benefits.
Equity Dividend Mutual Funds: Here the fund house mainly invests in equity stocks of the company. These funds must mandatorily invest at least 65% of the scheme’s assets in equities and equity-related instruments as directed by the SEBI. These funds mainly aim at capital appreciation over the investment tenure.
Thus, the above investment types slightly vary from each other in terms of returns and tax exemptions.
Investing in dividend mutual funds is simple and convenient as you can enrol through both online and offline channels. Thus you can invest in dividend mutual funds in the following ways:
If you do not have sound knowledge of mutual fund investment you can choose this method. You may invest through a broker which makes you eligible for investments through regular plans. Thus you may have to bear varied expenses on such investments. You may also invest in such funds independently through AMCs of your funds. For direct investment through an AMC you need to submit the following documents:
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If you want professional fund management and want to cut expenses like brokerage and commissions then you may opt for investment through online brokerage platforms. Here you can choose from various mutual fund portfolios already groups by efficient fund managers. You may choose a fund that aligns with your investment objectives and thus save time and effort of choosing funds individually.
People who invest in dividend mutual funds are the ones who either want to enter the mutual funds market through low-risk funds or seek opportunities to set up a steady source of income. Dividends provide constant payments to investors and are suited for investors like retirees due to its potential to generate income. These are less risky than other equity mutual funds and are investments that offer a steady stream of dividend payment.
The dividend payment is only possible if the shares of the company are performing well in the market. Thus when a company declares dividend payment it is an indicator that the company has made huge profits on its investments and thus wants to distribute it among the shareholders.
Dividend mutual funds also come with significant tax benefits for the investors.
Since dividends are linked to the profits made by the company, an investor must evaluate the past performance of the companies and invest only in profit-generating companies. A very high dividend payment may indicate that the company doesn’t have enough opportunities to grow.
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