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What are High Dividend Mutual Funds? Research Team | Posted On Saturday, January 18,2020, 05:09 PM

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What are High Dividend Mutual Funds?



Mutual funds that invest in companies paying high dividends are called high dividend mutual funds. Dividends are generally profits earned by the companies, which they eventually distribute to their shareholders. The asset management company can opt to pay dividends on a daily, weekly, monthly, quarterly or annual basis.

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What are High Dividend Mutual Funds?

Types of Dividend Mutual Funds:

Dividend Yielding Mutual Funds-Equity:

  • If a mutual fund scheme invests more than 65% of its investments in the equity class, then they are classified as dividend yielding mutual funds (equity).
  • They invest in the stocks of a company.
  •  They provide high returns but involve high risk exposure as well. Market volatility can have a negative or positive impact on these funds.
  • It has no lock in period, so liquidity is high.
  • Involves high transaction costs.
  • There is a tax of 10% on the dividends earned on equity funds, under dividend distribution tax (DDT).
  • This is a medium to long term investment.
  • Timing of the purchase and sale of stocks are critical, as market is highly dynamic.

See Also: Performance of Dividend Yield Funds

Dividend yielding mutual funds-debt:

  • If a mutual fund scheme invests more than 65% of its investments in the debt category, then they are termed as dividend yielding mutual funds (debt).
  •  They invest in bonds and securities of government, corporate, treasury bills and so on.
  •  Interest earned on these securities is returned as dividends to the investors.
  • They provide stable and high returns with low risk. As stock market fluctuations have no impact on debt funds, volatility and risk are low.
  •  Tax on dividend paying debt mutual funds are quite high.
  • Involves low transaction costs.
  • This is a shot term to medium term investment.
  • Timing has very little role, but duration of investment plays a major role.

See Also: Dividend yield funds in India

Benefits of High Dividend Mutual Funds:

  • High dividend mutual fund managers invest in blue chip stocks which have proven financial excellence. This means high returns are assured.
  • High dividend schemes ensure stable income over a period of time.
  • Less risky compared to equity mutual funds.
  • Tax benefits to the investors. In general income tax is paid by the one who receives income. But in the case of dividends, it is paid out by the company issuing dividends.
  • High dividend mutual funds are managed by highly professional fund managers, which eliminates the risk involved ensuring high returns.

How dividend mutual funds are taxed?

Investors need not pay tax on dividends earned from mutual funds below Rs 10 Lakhs. Yes, you heard that right.

If the dividend earned exceeds Rs 10 Lakhs, the investor is supposed to pay 10% tax on the total earnings of a specific year.

Sections applicable:

Section 10 (34) income tax act - Dividends earned on the stocks of Indian companies are tax free.

Section 10 (35) income tax act– Income received as dividends on equity mutual funds or debt mutual funds are tax fee.

At the same time, companies or mutual fund houses issuing dividends are expected to deduct taxes before distributing them.

See Also: Dividend Vs Growth Option

Section applicable:

The company must pay tax under this section on the profits earned. The remaining profit is to be distributed among the investors as dividends. This is exclusively for dividends declared by Indian companies.

Equity mutual funds are subject to 10% DDT. Debt mutual funds are subject to 25% DDT. With the addition of health and education cess and surcharge, the rate increases to 29%.

Top 5 high dividend mutual funds in 2020

Picking a mutual fund scheme is subjective. It depends on risk appetite, expected returns, time period and so on. Here we have mentioned a few high dividend mutual funds that could be considered profitable in 2020:

  1. Aditya Birla sun life dividend yield fund
  2. ICICI prudential dividend yield equity fund
  3. Principal dividend yield fund
  4. Templeton India equity income fund
  5. UTI dividend yield fund.

See Also: How to select Mutual funds India?

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