NEW DELHI : I want to invest ₹30 lakh in mutual funds for generating income through dividends. Please suggest some mutual funds schemes that generate higher dividend income.
—Name withheld on request
Mutual fund dividends are not an ideal option for generating regular income as there would always be an uncertainty regarding the frequency of dividend declaration. Moreover, the dividend payout amount may also fall short of your cash flow requirements. Plus, it is not a tax-efficient option as dividends from mutual funds are taxed as per as the tax slab of the investor. If your objective is to generate regular income from mutual funds, then I will suggest you to instead invest in short duration debt funds.
While you have not disclosed your return expectations, I am assuming that you have dividend yield expectations of 8% per year yielding monthly cash inflows of ₹20,000. Hence, I suggest you to invest ₹14 lakh from your investible surplus in the direct plans of any of these short duration debt funds—ICICI Prudential Short Term Fund and HDFC Short Term Debt Fund. Assuming an annualized return of 5% per year, your investment in short duration debt funds should easily sustain your monthly withdrawals for over 6 years.
The rest of your investible surpluses should be equally distributed among the direct plans of these large cap index funds and flexicap/ ‘large & mid-cap’ funds—Tata Index Sensex Fund or HDFC Index Sensex Fund; and Parag Parikh Flexi Cap Fund or Mirae Asset Emerging Bluechip Fund—through systematic investment plans (SIPs) of 1-year tenure. Assuming an annualized return of 10%, your equity portfolio should grow to about ₹28 lakh in six years. Thus, investing in the suggested equity funds would help in long term wealth creation and, thereby, allow you to replenish your debt portfolio after six years for continued regular income.
Try to route your SIP contributions through banks offering savings account interest rates of 5-6.5% per year for deposit slabs of ₹1 lakh- ₹10 lakh to earn higher interest income from the amount parked for the equity SIPs.
Naveen Kukreja is the chief executive officer and co-founder of Paisabazaar.com. Queries and views at firstname.lastname@example.org
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