Best Dividend Mutual Funds in India: Taxation, Difference with Growth Funds, And More!

Mutual Funds are a great form of investments for investors who cannot regularly monitor the market sentiments. But are there any mutual funds that pay dividends? Absolutely, an investor can opt for dividend mutual funds as these kinds of mutual funds focus on investing in dividend paying stocks only to generate strong wealth for investors.

As we know mutual funds is a pooled investment where investors “mutually” buy stocks, bonds and other investments. In the same way, best dividend-paying mutual funds captivate investors with their consistent payouts making them a reliable choice for steady income.

What are Dividend Mutual Funds?

Dividend mutual funds are the funds that focus on investing in dividend paying stocks. These funds aim to generate capital in an investor’s portfolio by generating a regular income through dividend payouts. The amount of dividend paid by the mutual funds is not fixed just like the companies as these funds are also considered to be high level risk instruments.

Best Dividend Mutual Funds in India

You can get efficient returns by investing in stable dividend mutual funds. You are required to first identify the best mutual funds or asset management companies with stable returns over the year. Here are some of the mutual funds that are efficient and reliable:

ICICI Pru Dividend Yield Equity Fund

ICICI Prudential Mutual Fund manages the ICICI Prudential Dividend Yield Equity Fund which is one of the largest funds and is widely known for its robust fund management practices with an efficient management system.  It was established in 1993 with the aim of focusing on the dividend paying companies to achieve capital appreciation and regular income distribution. The assets under management (AUM) of this fund amounts to 4256.91 cr with an expense ratio of 0.54%. As a result of the past year, the absolute returns provided by this fund are 55.24% with a CAGR of 31.33% over the past three years.

Aditya Birla SL Dividend Yield Fund

The particular fund is managed by Aditya Birla Sun Life Mutual Fund which aims to invest in companies that have a strong history of dividend payments. The fund management and research capabilities in Aditya Birla Group is exceptional as it manages an AUM of Rs 1366.05 Cr having an expense ratio of 1.42% and has been able to deliver absolute returns of 53.30% with a CAGR of 25.59% over three years.

LIC MF Dividend Yield Fund

It is one of the top dividend mutual funds which is operated by the LIC Mutual Fund with an aim to provide substantial returns by investing in the company that pays regular dividends. As the fund was founded in 1989, it is one of India’s oldest asset management companies that have been trustworthy to the investors.

The fund holds an AUM of Rs 189.29 Cr, an expense ratio of 1.45% with a stability and a lot of growth potential. Over the past year, the fund has delivered absolute returns of 59.72% with a CAGR of 26.14% over the three years.

HDFC Dividend Yield Fund

HDFC Dividend Yield Fund is managed by HDFC mutual fund which was established in 1999. These funds are established to invest in dividend yielding stocks through which regular income for investors can be generated with long term capital growth. The fund has a strong performance track record with an AM of Rs 5617.54 Cr approximately having an expense ratio of 0.56% with absolute returns of 47% and CAGR of 28.24% over the past three years.

Taxation on Dividends from Mutual Funds

There are several changes according to the Union Budget 2024 in the taxation framework for dividends received from mutual funds which is an essential aspect for mutual fund investors to know in detail.

The taxes on dividend income received from mutual funds are taxed as per the investors’ income tax slab rate. The change in the taxation policy has shifted the burden of tax from mutual funds companies to individual investors. The investors should appropriately report their income in their tax filings and as the TDS will not be deducted at the time of redemption and they will receive the full amount which has to be mentioned in capital gain tax when they file their income tax returns.

Also Read: Income Stocks

Growth funds Vs Dividend Mutual Funds

Factors to identify the best dividend mutual funds

Let us determine the factors that helps to identify the best dividend mutual funds:

Past Performance

Reviewing the past performance of mutual funds is essential to consider before any investments as it provides real insights about consistency and reliability about dividend payout by the assets management company. A fund that offers a stable growth with an excellent dividend history can be considered for investment.

Expense Ratio

Expense ratio represents the annual maintenance charge imposed by the mutual funds to finance the expenses of operations, management, allocation charges, etc. of the fund. Expense ratio affects the returns from the mutual funds; a fund with a lower expense ratio can be beneficial for investment.

Dividend Yield

Dividend yield signifies the potential of a mutual fund to generate regular income through dividend payouts which is calculated by dividing the annual dividends paid by the mutual fund by Net Asset Value. A fund with higher dividend yield is a good option as it can offer better regular returns.

Fund Portfolio

Investors should analyze the fund’s portfolio to gain insights and identify high dividend yield stocks where the asset management company invests to offer better dividends.

Conclusion

A dividend mutual fund focuses on investing in companies that offer regular income by investing into dividend paying stocks. However investors can gain far better returns by investing in individual stock through a demand and supply approach with the concept of top down, sector support, industry trends, etc.

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