For regular income - equity funds or balanced funds sahi nahi hai ...

Are you seeking regular income from your mutual funds? In that case, please do not look at equity funds or balanced funds. Do not consider regular dividends or even systematic withdrawal from such funds.

Read my article to know more ...

For regular income, equity and balanced funds sahi nahin hai ...

Read the English translation below:

Recent budget proposed by the Finance Minister introduced a tax on dividends from equity-oriented mutual funds. Some mutual fund investors and distributors were upset with this proposal. Some of them had opted for balanced fund seeking monthly dividend. Now these dividends have become taxable. The tax would impact the net amount received in hands.

First of all, let us understand the tax on dividends. This is not the regular income tax that is payable on the income received in hand. However, this is dividend distribution tax, which would be deducted before the dividend is paid out. The dividend that one receives remains tax-free in the hands of the recipient. This means that although the recipient does not have to add the dividend income in the taxable income and calculate the tax on it, it is received AFTER deduction of tax, which would mean that the investor’s returns are reduced.

This is what has upset those who invested in the balanced mutual funds seeking regular income.

We will not discuss about the merit of introducing such a tax. However, the focus of our discussion would be on the choice of equity or balanced funds to seek regular income. Before we launch the discussion, let us also add that now that the dividend is subject to distribution tax, many have started considering regular withdrawal, known as SWP (Systematic Withdrawal Plans) to get regular income. On paper, such a regular withdrawal strategy looks highly tax-efficient in comparison to dividends. This happens since the entire dividend amount is subject to tax, but in the withdrawal case, only the capital gains are taxable and not the capital withdrawn.

The question to consider should be: is it prudent to invest in equity funds or balanced funds for regular income? Very often, people get carried away with the taxes and try to save taxes, forgetting the true nature of the investment category. In the offer document of equity and balanced funds, an important item is called the “investment objective of the scheme”. In all such cases, the investment objective is “to provide long term capital appreciation” and not “to provide regular income”. In fact, even the nature of the asset does not support the ability to pay regular income.

We do not look at liquid funds when the objective is to create wealth. However, liquid funds are ideal when “liquidity” is the prime objective. Exactly in the same manner, if “long term growth” is the objective, equity could be a suitable asset category, but it is not suitable for short periods of time, or for liquidity, or for regular income.

- Amit Trivedi