Mutual Funds – How to Plan your Retirement with Mutual Funds

Mutual Funds – How to Plan your Retirement with Mutual Funds

Planning Retirement with Mutual Funds

A famous motivational writer had once said, “Like all successful ventures, the foundation of a good and comfortable retirement is planning”. In fact, planning for your golden days should ideally start during the prime itself. Retirement planning is a crucial financial goal. There are multiple products available such as Pension plans, Provident Fund, POMIS (Post Office Monthly Income Scheme), Tax Free Bonds, etc. However, one product that stands out from the crowd is Mutual Funds.

What makes Mutual Funds so special?

• Flexibility
Mutual Funds offer great degree of flexibility to the investors. You can start with a contribution as low as just Rs. 500. There is no upper limit on the amount that can be invested in these schemes.

• Potential for higher returns
Mutual Funds have the potential of generating higher returns as compared to the traditional instruments such as FDs, PPF, etc.

• Diversification
With Mutual Funds, investors get access to multiple asset categories. You can choose a scheme which is in sync with one’s risk appetite, financial goals, investment horizon. Diversification enables investors to strike the perfect balance between the 2Rs – Risk and Return. In short, there is something for everyone.

• Tax efficiencies
Mutual Funds are relatively more tax-efficient. For instance, ELSS Funds qualify for deduction under Section 80C. Long-term capital gains on equity funds are exempt from tax till Rs. 1 Lakh.

• Ease and transparency
They are extremely investor friendly. The application and transaction process are simple and hassle-free. Moreover, they are transparent as all the required information (past performance, investment details, etc.) are easily available.

So, which all Mutual Funds can you invest for your retirement planning?

Before forming a Mutual Fund Retirement Plan, you should assess these factors –

• How much risk you are comfortable with?
• How long will you continue to work? Or How far away are you from retirement?
• Retirement corpus that you want to have?

Basis these, you can choose from any of these options-

1. Equity Funds
These Mutual Funds invest a significant part of the corpus in the stock markets. They have the potential to generate higher returns as compared to other investment avenues such as FDs, debt funds, etc.). Equity funds invest across different market cap stocks basis the scheme’s objective.

When should you go for these?
Equity Funds by nature are aggressive. They come with a high-risk factor. So, if you are someone who has a good risk appetite you can go for these. Also, equity funds are more suitable for investors who start planning early. So, if you are in 30s, are going to be earning for a long time or basically far away from retirement, equity funds can be a good retirement planning option.

2. ELSS Funds
ELSS Funds serve a dual purpose. In addition to being a good long-term investment option they also provide tax savings. As per Sec 80C, investments in ELSS (till 1.5 Lakhs) is eligible for tax deductions. Also, the capital gains (long-term) on these funds are exempt from tax till Rs. 1 Lakh. The dividend paid is also tax-free in the investor’s hands. Additionally, compared to other tax saving scheme, they have a shorter lock-in period (3 years).

When should you go for these?
If you do not want to invest in two different set of products – one for retirement planning and the other for tax planning, ELSS Funds can be a good choice. But remember, that these funds also invest in equity market, so you need to have a decent risk appetite. Also, though they have a short lock-in period of three years. So, you should try to remain invested for at least five to seven years. That will help you to maximise the return potential.

3. Pension Funds
Mutual Fund Pension plans are debt-oriented hybrid funds. They invest a big chunk of the corpus in government securities, low-risk bonds and other such money market products. The balance is invested in stocks, equities and their derivatives.

As they are hybrid funds, they offer best of both the worlds (i.e. equity and debt). The equity portion helps the Mutual Fund Pension plans grow and earn higher returns when the markets are strong or in an upswing. The debt portion helps to bring down the risk quotient of the investments. Mutual Fund Pension plans are taxed as per the rules applicable for non-equity investments.

When should you go for these?
If you have a low-risk appetite but still want some equity exposure, then you can try out the mutual fund pension funds.

4. Sector Funds
Sector or Thematic Funds invest in stocks from a specific sector such as banking, utilities, energy, etc. As the market exposure is restricted to only some select sectors, their risk quotient is higher when compared to traditional MFs.

When should you go for these?
If you have in-depth knowledge about a certain sector/ industry or can constantly monitor policy changes, market fluctuations, economic conditions, then you can go for these. Many sector investors start when the sector funds are beaten down and sell when they recover and grow.

5. Asset Allocation Funds

Asset Allocation Funds invest across a wide range of instruments. This includes equity, debt, bonds, government securities, real estate stocks, etc. Some AMCs offer a scope to alter the portfolio composition. This option can be helpful for retirement planning. For instance, you can opt to reduce the equity percentage with age so as to reduce the risk.

When should you go for these?
You should opt for Asset Allocation Funds when you would like the fund to rebalance your portfolio based on a pre-set asset allocation option without regular intervention. It is actually a hassle-free retirement planning option.

Ways to invest in Mutual Fund:

There are multiple ways to invest in a Mutual Fund.

1. Lump Sum: Most option people invest in a lump sum by putting in one go. 

However, there are systematic options of investing in mutual funds as well. They are:

2. SIP: Systematic Investment Plans are a boon for investors who want to start small. It offers flexibility and also creates a disciplined attitude to savings. SIPs are also a great way to spread risk across market cycles. 

Some of the key benefits of SIPs are:

• You can start with amount as low as Rs. 500
• Investment through SIPs ensures regularity. It removes worries such as timing your investment, looking at market trends, etc.
• SIPs have the advantage of compounding. They help to average out the cost and optimise earnings in the long-run.
• There are multiple kinds of SIP Plans available. For instance,
• Top–Up SIPs which allow investors to increase their contribution amount over time.
• Flexible SIPs offer the flexibility to increase or decrease the SIP amount. This ensures that in times of cash crunch or an unexpected windfall, the investor is able to put the money to the best use.

3. STP:

Systematic Transfer Plans are like Systematic investment plan but it is a transfer from one fund to another in a systematic manner, instead of investing the entire amount in the target fund in a lump sum. This is a very easy investment option for the retired people where you have a large corpus for investment but do not wish to enter the target fund in one go. Hence you can park your funds in another fund and then systematically transfer the same over time.

You can also withdraw your investment systematically and create your own pension fund by using:

Systematic Withdrawal Plans are like quasi pension schemes. They allow individuals to draw a fixed income from their mutual funds in the future/ post retirement. The frequency of withdrawal can be monthly, quarterly, bi-annually or annually basis the individual’s requirement.

It is never too early to start planning for your retirement. All you need to choose a scheme or fund that suits your requirement. And if you feel confused about which is the best mutual fund for retirement planning, you can always reach out to market experts such as IndiaNivesh. They offer a wide range of services in areas such as equities, mutual funds, derivatives, IPO, insurance and corporate advisory. Their in-depth market knowledge, experience and technological expertise will ensure that you can have a robust Mutual Fund Retirement Plan in place.

Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing


How to Make Money from Dividends

Every investor has a common goal – to make money from his or her investment. There are two routes through which this can be achieved Capital Appreciation Making money from the dividend payout For capital appreciation, the fundamental is simple. Buy when low and sell when high. The difference is the profits. Most investors aggressively follow this principle and are always on the lookout for good stocks at a cheap valuation. However, there is another effective way to make money from shares which are often overlooked by investors especially the uninitiated. It is through Dividends. Read on to know more about how to make money from dividends. Dividend - Meaning A dividend is the amount of money paid to the shareholders from the earnings (including reserves) of the company. It is a reward given to you, as a shareholder for investing your money in the company. It is a way to: Return a portion of the profits to the shareholders Attract more investors Show financial strength Create more demand for their stock which can have a positive impact on the market value of the shares. There is no legal obligation for companies to issue a dividend. Newly started companies or those with a high growth rate seldom pay out dividends. This is because they need to reinvest their profits for research, growth or expansion. However, established companies offer a regular payout to reward their shareholders. When the dividend is announced, it decides a record date and all registered stockholders (as on the record date) are eligible to receive the dividend payout in proportion to the number of shares held by them. Frequency of dividend payout Usually, companies declare dividends twice in a year i.e. Interim Dividend and Final Dividend. However, this is purely at the discretion of the company and is not subject to any guidelines or rules. Types of dividend: A dividend is a proportion of retained earnings that is paid out to the stockholders. There are five types of dividend payout mechanism: 1. CashThis is the most popular and commonly used dividend type. Cash dividends are usually done through electronic transfers to the investor’s bank accounts or through cheque payments. For example, ABC Co.’s Board of Directors declared a cash dividend of Rs. 3 per share for the 2 lakh outstanding shares, to be paid on 30th Sept. Ms. A holds 2,000 shares of ABC Co. She would receive Rs 6,000 as dividend income in her bank account on the said date. 2. StockStock dividends are paid to the shareholders by giving them additional new shares of the company. This allotment is done at zero consideration. The issue of stock dividends is done on a pro-rata basis. In case the company issues additional stock (as a dividend) which is less than 1/4th of the number of existing outstanding shares, it is treated as a stock dividend. If the new issue is of a greater proportion (i.e. more than 1/4th), then it is referred to as a stock split. The fair value of the new stock issued as a dividend is calculated basis the fair market value on the date of dividend declaration. 3. ScripDividend payouts done through promissory notes are scrip dividends. At certain times, companies may have a cash crunch or insufficient earnings for them to pay out dividends. In such scenarios, they may issue scrip dividends to the shareholders. The shareholders are given a note or scrip that promises payment at a certain future date. Usually, these promissory notes come with a definite maturity date. They may or may not be interest bearing. 4. BondBond dividends and scrip dividend are similar in principle. They both indicate a dividend payout at a deferred future date. In the case of a bond dividend, the company makes a promise to pay out the dividend at a later date in the future. To that effect, it issues bonds to the shareholders instead of cash. Bonds used as a way to pay dividends always come with interest. Usually, bond dividends have a longer maturity date as compared to scrip dividends. 5. PropertySome companies pay the dividend in the form of assets (excluding cash). For instance, a company may distribute its superfluous assets or own products as dividends. This form of dividend payment is not very common in India. Making money from dividend Most investors make the cardinal mistake of taking the dividend yield as an absolute value. They feel that a yield of 2% or 3% is too less for them to make a good amount of money from dividends. However, as a prudent investor, you must keep the following points in mind: 1. Growth with timeAn established or fundamentally robust company will keep on increasing the dividend payouts with time. Also, while the dividends will increase, your purchase cost stays constant throughout the holding period. So, if you calculate the dividend yield, the numerator (annual dividend) will keep on increasing while the denominator (purchase cost) remains unchanged. In short, a higher yield in the future. Expert Tip: Making money from dividends is like a test match. You need to play consistently in the long run. You should not treat it as a 20-20 match. 2. TaxationIt is important to understand the tax liabilities for income from dividends. If the dividend is paid by an Indian company, it is exempt from tax until such income does not exceed Rs. 10 Lakhs. Dividend income above 10 Lakhs is subject to a 10% tax. However, dividends received from a foreign company is added under the category “Income from other sources” and taxed as per slab. Expert Tip: Hence, it is important to choose the right stock to get more net income in hand. Top #5 Things to consider before dividend investing Making money from dividends needs careful evaluation of several factors. These include:1. Yield Percentage:The dividend yield of the stock at the time of investing. It is important to check the yield percentage and not just the dividend per share.2. Profit Growth Rate:The growth rate of the company’s bottom and top line. The profit growth rate can be useful in projecting future dividend earnings.3. Financial Health of the Company:The overall health of the company. You should check the balance sheet to find the amount (and type) of debt. Too much debt or continuous fall in sales revenue may pose risk to dividend income in the future.4. Dividend History:Remember that paying a dividend is not an obligation. Companies are free to reduce or stop these payouts. Hence, analyse the dividend history of the company under consideration.5. Tax Rules:Current tax rules applicable to dividend income. If you feel that you are not able to decide the highest paying dividend stocks or need help in choosing the right stock for you, you can always reach out to experts like IndiaNivesh. Their in-depth understanding of the Indian markets, extensive research, and experienced team ensures that each customer can make the right choice as per their needs. They regularly come out with useful reference material which highlights the top dividend-paying stocks. IndiaNivesh offers financial solutions in numerous domains – Mutual Funds, Broking, IPOs, Insurance, Derivatives, PMS, Investment Banking, Wealth Management, and Strategic Investments. Get in touch with the experts today!   Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing

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Stocks vs Mutual Funds – Know the Difference between Stocks and Mutual Funds

Mutual funds and stocks are two very different concepts and people often misconstrue them to be the same. If you are entering the financial market, you have two options to invest. Either you can choose to invest in equities directly through the stock market or you can choose the indirect route of investing in equities through the mutual funds. In this article, you will learn about the difference between shares and mutual funds.Before learning about mutual funds vs. stocks, let us understand the meaning of each term.What are Shares/Stocks?Shares or stocks are issued by the company through IPO (Initial Public Offering) to raise money for expansion and other purposes. These stocks can be bought or sold through demat or trading account. After the listing of shares on the stock exchange through IPO, these shares are available to the public in the secondary market. Depending on your future goals, you can invest in companies by purchasing their stocks for long term. By investing in stocks you get the benefit in the form of price appreciation of stock value when the company performs well.Let us now learn about what are mutual funds.What Are Mutual Funds?Mutual funds are professionally managed investment funds that collect money from different investors and invest them to purchase shares or securities. You can invest in the mutual funds by opting either the lump sum mode or the SIP mode. The returns generated on mutual funds are distributed to you in proportion of mutual fund units held by you. After understanding the meaning of both the terms, let us understand the difference between mutual fund and share market stocks.Difference Between Shares And Mutual Funds• When you invest in mutual funds, the money is pooled by the investment managers and invested in shares or securities of different companies. This provides diversification to your investment. On the other hand, this type of diversification is not possible when you make the investment in shares or stock market directly. • When you invest in shares directly, it is your responsibility to do an analysis of a company, its price, its future prospects, etc. While on the other hand, when you invest in equities through the mutual funds you get the assistance of professionals who carry out all the necessary research before investing your money in shares.• When you invest in shares of a company, you become a part of their growth story as you are now its shareholder. You will also get dividends if the company performs well. But, in the case of mutual funds, you purchase their units and therefore, you are in no way connected to the growth or progress of an individual company.• Investing in shares directly can be a little risky because the whole exposure is towards a single company. In case of mutual funds, your money is invested in various companies which mitigates your risk.• Investing in equities directly can time consuming as it requires good research of the companies. On the other hand, investing in mutual fund is very easy and simple. All you need to do is find a good mutual fund company and invest your money.• Mutual funds are maintained by the fund managers. Here you do not have the option of changing the stocks present in the portfolio. On the other hand, when you invest in shares directly, you can easily sell stocks from your portfolio and buy shares of any other company.• Demat account is the primary requirement to invest in shares. Without a demat account, you cannot purchase or sell shares or securities in the Indian financial market. Whereas in the case of mutual funds, you do not require a demat account and you can invest in them directly.• Mutual funds can give you higher returns if you stay invested in them for a longer period of time. But in the case of investing in shares, you can trade or even make short term profit with the right strategy of buying, selling or holding any stock.• Investing or trading in shares involves brokerage charges. Whereas in the case of mutual fund investment, the charges include management fees, entry load, exit load, etc.The above mentioned are a few of the differences between investing in mutual funds vs. stocks. The next question about mutual funds vs. stocks that might arise in your mind is that among stocks or mutual funds, which is better. In this section of the article, we will resolve this dilemma. Stocks or Mutual Funds - Which is Better?Whenever there is a debate on investing in mutual funds vs. stocks, there is always a common question in everyone’s mind that among these two options, which one is the best. Here you need to understand that both these investment options are very different from each other. You must invest in that option which suits your style of investing and risk appetite. If you are fine with taking risks, you can invest in stocks directly. But on the other hand, if you are a conservative investor and do not want to take risks, mutual funds is the right bet for you. Therefore, selecting any investment option among these two as the best would not be justified because it is the individual’s preference and style of investment that matter the most. If an individual has a clear financial goal in his head than whatever option he selects among the two that would be the best for him.ConclusionSo by looking at the differences between mutual fund and share market, it would not be wrong to say that both the investment options are good in their own ways. If selecting an investment option among these two is a big dilemma for you, then you can contact IndiaNivesh Ltd. We are the leading financial broking firm in India. Our advisors understand your financial goals and based on that suggest you the right investment option. Our experts and professionals help you in selecting the best mutual funds for investment. In addition, you can open a demat account with us and invest in shares on the basis of our regular research reports. Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing

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  • Cost Inflation Index - Meaning, Calculation & Benefits

    Inflation is an economic term and referred to the continuous rise in the price of goods and services, thereby reducing the purchasing power of the money. The pinch of inflation is felt by all sections of the economy, be it, the consumers, investors, and the government.  And, even though it increases the cost of living, inflation is a necessary evil and desirable for the growth and development of the economy. For the reason of inflation, it is only fair to pay more for your goods like comb and brush over the years due to an increase in the price. For the same reason, it is unfair to pay capital gains tax on your assets without taking into account the impact of inflation on the value of the asset. Cost Inflation Index(CII) is the index to calculate the increase in the price of assets year-on-year due to the impact of inflation. What is the Cost Inflation Index? Cost Inflation Index or CII is an essential tool for determining the increase in the price of an asset on account of inflation and is useful at the time of calculating the long-term capital gains on the sale of capital assets. It is fixed by the central government and released in its gazetted offices by the Ministry of Finance every year. Capital gains are the profits arising from the sale of assets like real estate, financial investment, jewellery, etc. The cost price of the asset is adjusted taking into account the Cost Inflation Index of the year of purchase and the year in which the asset is sold, and the entire process is known as Indexation. Cost Inflation Index Calculation The cost inflation index calculation is done by the government to match the inflation rate for the year and calculated using the Consumer Price Index (CPI). Cost Inflation Index India for the financial year 2019-20 has been set at 289. Change of the base year for the Cost Inflation Index The cost inflation index base year was changed in the Union Budget 2017 from 1881 to 2001. The base year was changed by the government to enable accurate and faster calculations of the properties purchased before April 1, 1981, as taxpayers started to face problems with valuations of older properties. The base year has an index value of 100, and the index of the following years is compared to the index value in the base year to determine the increase in inflation. With the change in the base year, the capital gains and tax burden has reduced significantly for the taxpayers as it now reflects the inflated price of the asset realistically. The current Cost Inflation Index Chart for each year is as under- How is the Cost Inflation Index (CII) used in calculating capital gains To calculate the capital gains on your assets the purchase price of the asset is indexed by the cost Inflation Index using the formula below- Indexed cost of the asset at the time of acquisition = (CII for the year of sale/ CII for the year of purchase or base year (whichever is later))*actual cost of acquisition If suppose you purchased a flat in December 2010 for Rs 42 lacs and sold in Jan 2019 for Rs 85 lacs. Your capital gain from the sale of the flat is Rs 43 lacs. The CII in the year in which the flat was purchased is 148, and the CII in the year the flat was sold in is 280. The purchase price of the flat after taking into account the Cost Inflation Index is = (280/148)*Rs42 lacs= Rs 79. 46 lacs  This is the indexed cost of acquisition. Your long-term capital gain after taking indexation into account is Rs 85,00,000- Rs 79,45,946 = Rs.5,54,054. Long-term capital gains on the sale of property are taxed at 20% with indexation benefit. So, your tax liability, in this case, would be- 20% of Rs 5, 54, 054= Rs 1,10,810 Without indexation benefit, the capital gains are taxed at 10%. In this case, the capital gains would be- Sale price of the flat - purchase price of the flat = Rs 85,00,000 – Rs42,00,000 = Rs.43,00,000.  The capital gains tax without indexation benefit will be 10% X Rs 43,00,000 = Rs.4,30,000. Thus, indexation helps reduce the long-term capital gains and reduce the overall tax burden for the taxpayer considerably. Indexation benefit can be used for investments in mutual funds, real estate, gold, FMPs, etc. but is not applied for fixed income instruments like FDs, recurring deposits, NSC, etc. Few important tips to remember about the Cost Inflation Index- If you receive an asset as a part of the will, then in such the CCI for the year in which it was transferred will be considered and not the CCI of the purchase of the asset Indexation benefit for the cost of improvement of the asset is the same as the cost of improvement of the asset. Cost of improvement incurred before 1981 to be ignored. CONCLUSION Cost Inflation Index is an important parameter to be considered at the time of selling long-term assets as it is beneficial for the investors. Reach out to our experts at IndiaNivesh for any queries about capital gains arising from the sale of assets for correct guidance.   Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing. 

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  • Dematerialisation of Shares – Meaning, Process & Benefits

    The online platform has revolutionised the way we live. Whether it is transacting, connecting with a loved one, getting updated about the happenings in the world, everything can be done online. When it comes to investments, the online platform provides ease and convenience. Investment in shares and share trading is a prevalent activity undertaken by many investors. They invest their money in the stock of a company with a view to earn profits when the stock value rises. When shares are purchased, share certificates are issued in physical form containing the details of the investor and the investor. However, these physical share certificates are inconvenient, and so the concept of dematerialisation has been introduced. Do you know what it is? What is dematerialisation? Dematerialisation of shares means converting physical shares and securities into an electronic format. The dematerialised shares and securities are, then, held in a demat account which acts as a storage for such shares. Dematerialised securities can then be freely traded on the stock exchange from the demat account. How does dematerialisation work? For the dematerialisation of securities, you need to open a demat account with a depository participant. A depository is tasked with holding shares and securities in a dematerialised format. As such, the depository appoints agents, called, Depository Participants, who act on behalf of the depository and provide services to investors. There are two licensed depositories in India which are NSDL (National Securities Depository Limited) and CDSL (Central Depository Services (India) Limited). Need for dematerialisation of shares Dematerialisation of securities was needed because it became difficult for depository participants to manage the increasing volume of paperwork in the form of share certificates. Not only were there chances of errors and mishaps on the part of the depository participant, but physical certificates were also becoming difficult to be updated. Converting such certificates into electronic format frees up space and makes it easy for depository participants to track and update their investor's stockholding. Benefits of dematerialisation for investors As an investor, you can get the following benefits from dematerialisation – You don’t have to handle the physical safekeeping of share certificates. Since your investments are converted in electronic format, you can easily store them without the risk of theft, loss or damage You can access your online demat account and manage your investments from anywhere and at anytime The charges associated with the demat account are low. Depository participants change holding charges which are minimal and you don't have to pay any stamp duty on dematerialised securities Since no paperwork is required to be done, the transaction time is considerably reduced Given these benefits, dematerialisation proves advantageous. Nowadays, the practice of holding physical securities has become almost obsolete and buying through a demat account has become the prevailing norm for investors. How to convert physical shares to demat? To convert physical shares to demat, the following steps should be followed – You should open a demat account with a depository participant. A depository participant can be a bank, financial institution or a stockbroker who is registered as a depository participant with the two licensed depositories of India You would then have to avail a Dematerialisation Request Form (DRF) from the depository participant and fill the form Submit the form along with your share certificates. The share certificates should be defaced by writing ‘Surrendered for Dematerialisation’ written across them. The depository participant would, then, forward the dematerialisation request to the company whose share certificates have been surrendered for dematerialisation. The request should also be sent to Registrar and Transfer (R & T) agents along with the company The company and the R & T agents would approve the request for dematerialisation if everything is found in order. The share certificates would also be destroyed. This approval would then be forwarded to the depository participant The depository would confirm the dematerialisation of shares and inform the depository participant of the same Once the approval and confirmation is complete, the shares would be electronically listed in the demat account of the investor Buying securities in a dematerialised form If you are looking to buy stock in a dematerialized form, here the simple steps that you can take for the same – Choose your broker for buying the securities and pay the broker the Fair Market Value of the securities that you want to buy The payment would be forwarded by the broker to the clearing corporation. This would be done on the pay-in day The clearing corporation would, then, credit the securities to the broker’s clearing account on the pay-out day The broker would then inform the depository participant to debit its clearing account and transfer the shares to the credit of your demat account The depository would also send a confirmation to your depository participant for the dematerialisation of shares in your account. The dematerialised shares would then be reflected in your demat account You would have to give ‘Receipt Instructions’ to your depository participant for availing the credit of shares in your demat account. This is needed if you hadn’t already placed a Standing Instruction for your depository participant when you opened your demat account. Similarly, for sale of dematerialised shares, the process is opposite. Trading in stocks in a dematerialised format is simple, quick and convenient. It has also become the practice of the current market. So, if you want to buy or sell securities, open a demat account and start trading in dematerialised securities. Should you have any doubts, get in touch with the team at IndiaNivesh who will look into your requirement and lead you towards a quick resolution.    Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing. 

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  • High Dividend Mutual Funds

    Dividend mutual funds are a type of mutual fund that pays a regular dividend to the unitholders of the mutual fund scheme, thereby creating a regular source of income for them. The investment strategy of the fund manager is to invest in a basket of companies that have a steady flow of income and promise to pay periodic payment to the investors. Some investors prefer a regular source of passive income from their investments. Mutual fund schemes that offer a high dividend are a popular choice for such investors. The frequency of payment of dividends is decided by the fund manager and is usually fixed. Dividends can be paid daily, monthly, quarterly, six-monthly, or yearly, and the frequency of payment is mentioned beforehand. However, there is no guarantee on the rate and amount of the dividend to the investors and the payment of dividend is subject to the performance of the fund. There are 2 types of dividend mutual funds based upon the asset class that they invest in. 1. Dividend Yielding Mutual Fund (Equity) • Mutual fund schemes which invest more than 65% of their corpus in equity shares of companies • Like any other equity scheme, they have the potential for higher returns, but also carry a higher risk • Investors should invest in these schemes with an investment horizon of medium to long term 2. Dividend Yielding Mutual Fund (Debt) • Mutual fund schemes which invest more than 65% of their corpus in debt instruments of government and corporations like treasury bonds, commercial papers, etc. • These funds carry low risk and provide average returns to investors • Interest received from the various instruments is paid as a dividend to the investors• Investors should invest in these schemes with an investment horizon of short to medium term Tax treatment for dividend mutual funds Till now, dividend income received by the investor used to be recorded under the income head of “Income from other sources” and such income was tax-free in the hands of the investor. However, as per the Union Budget 2020, the DDT is now abolished for companies and mutual funds. From April’20 onwards, any dividend received above Rs 5000 will be taxed in the hands of the investor. It will be taxed as per the individual tax slabs for both equity and debt schemes. Only debt investors who fall in the lower slabs of 10% and 20% will pay lesser taxes on dividends. For all the others, the taxation would be higher going forward. Why should investors invest in high dividend mutual funds? Dividend mutual funds offer unique advantages to the investors, especially when the macroeconomic condition of the country is weak; these investments provide the reliability of income to investors. The benefits of dividend mutual funds which should be kept in mind while investing in such funds• Fund managers of dividend mutual funds invest in companies which can pay steady dividends and even if there is a slowdown in the economy, as companies do not want to send any negative signals, they avoid curtailing payment of dividends, thus making them less volatile than other funds.• Overall returns from these funds are less affected as compared to other funds as the dividends provide a hedge against market volatility.• In a low-interest rate regime, investors looking for a higher consistent income can opt for dividend mutual funds. Disadvantages of a dividend mutual fund scheme • Returns generated by dividend mutual fund schemes are lower as compared to growth schemes in case of rising markets• These funds are not suited for aggressive investors looking for higher returns from their investment• Moreover, with the abolition of Dividend Distribution Tax (DDT), investors in the higher tax-bracket will have to pay higher taxes on the dividend income. Role of dividend mutual funds in a portfolio Invest in dividend mutual funds with an investment horizon of 7 to 10 years for optimal returns. Investment in such funds should be a part of your strategic asset allocation and to lower the volatility of the overall portfolio. Aggressive investors can allocate less than 10% of their portfolio in such funds. Conservative investors, on the other hand, can allocate a higher percentage to these funds. Essential things to keep in mind while investing in dividend mutual funds • Conservative investors looking to invest in dividend funds should invest in large-cap funds, preferably of blue-chip companies that pay a higher dividend. Investing in companies with a higher proportion in mid & small-cap companies will increase the risk of the investment, thereby defeating the purpose of investment• Invest in a fund which has been in existence for some time and witnessed a few market cycles• Avoid investing in a fund with a small corpus to minimize risk as few wrong investment calls can significantly hamper returns• The expense ratio plays a vital role in determining the overall returns from a scheme. Choose funds with a lower expense ratio   CONCLUSION Investing in high dividend mutual funds is a good option if you are looking for a regular income through dividends. Consult our experts at IndiaNivesh to help you guide through the allocation of funds in these schemes as per your investment horizon and risk profile.   Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing. 

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