Dividend Funds - Why to invest in them?
Mutual funds provide versatile options for money saving as well as returns of investments. It is important to understand the different options available in mutual funds before investing in the most suitable option. How does one determine what option to choose for investing in mutual fund? The choice would largely depend on the expectation that you have from the investment being made. If the intention is to have a longer term investment for higher rate of returns, a growth fund would be an ideal option. However if you intend upon having a shorter term investment with immediate and regular returns, then dividend funds is the better option to go for. So, how is a dividend mutual fund a better short term return on investment option? For this, one needs to understand how a dividend fund works.
Understanding dividend fund
In a typical growth fund, the profits that are earned form the investments are again invested back into the fund, which enables an increase in the NAV of the fund and is beneficial in the longer term. However there would not be any returns in shorter term. A dividend fund addresses this requirement by providing returns on the Mutual fund investment in shorter period of time. How does this work? In a dividend fund, the profits that are earned are not invested back into the fund but are provided to the investor. Hence, an investor in mutual fund with dividend option would be receiving the returns whenever the fund makes profit instead of waiting for a longer term. However it needs to be noted that these dividends are paid out only when the fund makes a profit, therefore there is no set time period or a fixed amount of when and how much is paid as dividend. The payout is made from the NAV of the unit.
When to opt for dividend fund?
Many of the financial advisors suggest dividend fund to be a better option to invest in mutual fund if the investor is looking for the following reasons.
- Short term investment: A dividend fund is suitable if the inclination of the investor is to have a short term investment and does not want to lock away the funds for a longer period of time. This option facilitates returns in a shorter duration and to meet immediate requirements.
- Regular returns: A dividend option provides a payout whenever the fund earns a profit. This ensures a regular income in comparison to a growth fund which does not provide any returns in between. However it needs to be kept in mind that that the returns that are being paid out are from the NAV, unlike the returns received by investing in equity of a company.
- Investment as a retirement option: The short term and regular returns features of a dividend fund makes it an ideal option for individuals in retirement. They would receive regular returns without waiting due to a longer lock-in period.
So, if any of these reasons is an important consideration for you to make an investment in mutual funds, opting for a dividend fund is the better option to choose.
Mr. Ajay Kumar Jain, M.Sc, Chief Managing Director
Being the Chairman cum Chief Managing Director, he focuses on holistic investment planning and wealth management and tries to make investment planning simpler for retail and HNI investors. Investor education is one of the prime things that Mr. Ajay Jain focuses on as he believes financial education is the foundation of successful investing. With over two decades of experience, Mr. Jain has made a mark in the Indian mutual fund industry due to his compassion and sheer hard work.