Mutual fund dividends are not an ideal option for generating regular income



i want to invest ??30 lakh in mutual funds to generate income through dividends. Please suggest mutual fund programs that generate higher dividend income.

—Name hidden on request

Mutual fund dividends are not an ideal option for generating regular income as there would always be uncertainty about how often to declare dividends. In addition, the amount of dividend paid may also be less than your cash flow needs. In addition, it is not a tax-efficient option, as dividends from mutual funds are taxed according to the investor’s tax regime. If your goal is to generate regular income from mutual funds, I would suggest that you invest in short term debt funds instead.

While you haven’t disclosed your return expectations, I’m assuming you have dividend yield expectations of 8% per annum, which generates monthly cash inflows of ??20,000. Therefore, I suggest you invest ??14 lakh of your investable surplus in the direct plans of one of these short term debt funds – ICICI Prudential Short Term Fund and HDFC Short Term Debt Fund. Assuming an annualized return of 5% per year, your investment in short-term debt funds should easily support your monthly withdrawals for more than 6 years.

The remainder of your investable surplus should be distributed equally among the direct plans of these large cap index funds and flexicap / “large and mid cap” funds —Tata Index Sensex Fund or HDFC Index Sensex Fund; and Parag Parikh Flexi Cap Fund or Mirae Asset Emerging Bluechip Fund — through one-year systematic investment plans (SIPs). Assuming an annualized return of 10%, your equity portfolio should reach approximately ??28 lakh in six years. Thus, investing in the suggested equity funds would help build long-term wealth and hence, allow you to replenish your debt portfolio after six years for continued regular income.

Try to route your SIP contributions through banks offering savings account interest rates of 5-6.5% per annum for deposit installments of ??1 lakh- ??10 lakh to earn higher interest income on the amount parked for equity SIPs.

Naveen Kukreja is the CEO and co-founder of Queries and views at [email protected]

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