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Can retired people bank on dividends from mutual fund schemes?

Many retired individuals opt for the dividend option in mutual fund schemes. They believe that it is the best way to draw a regular income from their mutual fund investments. Many investment experts also recommend parking money in equity-oriented balanced schemes and opt for a dividend to generate a regular income. However, this strategy has its shortcomings.

One, a mutual fund need not declare dividend regularly. Mutual funds are mandated to declare dividend on realised gains on their schemes. This means the scheme may not declare dividend if it is not sitting on profits.

You have to remember this point if you are planning to invest in an equity mutual fund scheme to generate a regular income to meet your living expenses.

“You can’t rely on the dividends. You might or might not get them. It depends upon the profits made by the mutual fund scheme, “says Amit Suri, Director and CEO, AUM Wealth Management Private Ltd.

How to deal with it?

“Investors who are not dependent on the dividend for their monthly expenditure should opt for managing their withdrawals themselves. For individuals who depend on these payments for their day-to-day expenses, a systematic withdrawal plan is better,” says Pankaj K Gera, Chief Financial Planner, Gera Wealth Creators.

Systematic Withdrawal Plans or SWPs allow investors to withdraw a fixed amount periodically from their investments. However, even this method has its drawback. If you continue to withdraw money regularly from a scheme during a bad phase, you might start dipping into your capital.

Manage your withdrawals

To begin with, it is not a great idea to bank on equity mutual fund schemes to meet your living expenses. A debt mutual fund scheme would be a better option. However, it is always better to opt for schemes like Senior Citizens Savings Scheme or Post Office Monthly Income Plan that assure periodic returns to generate primary income that you need to take care of your regular monthly expenses.

You can invest in a mutual fund scheme that matches your risk profile to generate periodic income to supplement your primary income. However, it would be better if you make periodic withdrawals after considering the performance of the scheme rather than opting for an auto-pilot mode like SWP if you do not want to touch the capital.

“It is much convenient for the retired people to withdraw the money according to their will and need than to keep a track on the dividends and when they will be paid,” says Pankaj Gera.

Also, you should take into account the dividend distribution tax paid by mutual fund house before opting for the dividend option. Equity mutual fund schemes do not pay any DDT, but debt mutual fund schemes pay DDT of 28.84 per cent on dividends declared. That means even though you are paying any tax on dividends, the money you are getting is already taxed.

If the retired person is in the lower tax bracket, opting for withdrawal would be a better choice. If debt mutual funds are sold before three years, the short-term capital gains are added to the income and taxed according to the income tax slab applicable to the investor, which means a retired investor in the lower tax slab of 10 per cent or 20 per cent would pay less tax on withdrawing the money.

“Debt funds have dividend distribution tax which is as bad as your taxation. So, almost 28-30 per cent of your money is eaten up before you get it,” says Amit Suri.

If you are opting for dividends, ensure that you do a good job of keeping a track of them. “Some people lose track of dividends paid by the company. This is because the dividends might not be paid monthly or quarterly,” says Pankaj Gera.

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