Dividend Option Now Redundant

As a media house, we keep receiving complaints from investors about fund houses not having announced dividend on their mutual fund schemes, and help them out. Many of these complaints are received from retired persons who are dependent on the dividend income to meet their ends. In the last couple of years their problem has compounded. First, in the Union Budget of the year 2018, the government announced the Dividend Distribution Tax (DDT) which lowered the returns in the hand of investors as mutual fund houses were now required to cut tax before distributing dividend.

Now, though the budget proposal of 2020 has corrected that, it has, however, put additional burden on some sets of investors. Now the onus is on investors to pay tax on the dividends received as per the Income Tax slab applicable to the investor. This has increased the tax burden for some investors. The DDT on equity funds was 11.648 per cent on equity mutual funds and 29.12 per cent on debt mutual funds. From the next financial year, a person in the higher tax bracket would need to pay 30 per cent plus surcharge and cess. This has made the ‘dividend’ option of the scheme very unattractive from the return perspective to an investor.

Besides the recent proposal there are other reasons why I believe that the dividend option should not be preferred by investors. First of all there is utter confusion as many believe that dividend distributed by a mutual fund scheme is the same as distributed by a company. Actually a company pays out dividend from the profit it makes whereas in an equity mutual fund, the fund is paying you back your own money. Moreover, periodic selling of your MF units to pay out your dividend also diminishes the wealth creation potential as you have a lower fund corpus to grow after selling.

The reason an investor chooses the dividend option is because of the liquidity it provides. The Systematic Withdrawal Plan (SWP), I believe, is more of a tax-efficient option to get liquidity in the long run. While using SWP you are also in control of how much liquidity you need while in case of the dividend option you are at the mercy of the fund house. The proposal, though it will be disliked by many, will be good for most of the mutual fund investors in the long run if they opt for a more tax-efficient option such as SWP. Finally, what matters is the return you get on your investments.

SHASHIKANT