Debt Funds With Dividend Option: Are These Suitable For Those Looking For Regular Income?

Debt funds that provide reasonable returns in comparison to conventional bank deposits over the medium term do not augur well for investors seeking regular income by opting dividend option.

Here's a take on why for the above argument.

1. Taxation aspect -Dividends that are paid from the surplus or profits of a fund do not arise taxation implication on an individual investor. But as debt funds attract DDT or dividend distribution tax of 28.8%, for which fund houses deduct taxes before distribution of dividends to investors, an individual's post-tax returns are reduced.

2. Regular Income Flow is not assured: It is not from the capital that a fund house pays dividends to its investors but from surplus or profits, so there is no certainty aspect with regard to monthly income flow. As when the fund house makes no profit or incurs loss it may not announce any dividend.

In comparison for meeting out your regular cash flow needs you can choose a SWP with growth option as the taxation efficiency achieved through it is better than debt funds with dividend option.

The gains withdrawn from SWP under growth plan are taxed as per the slab rate of the investor concerned and for those falling in low income tax bracket of 10-20%, it is comparatively a better option.

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