Have seen a lot of people wanting opting for dividend when investing in mutual funds. This article by Dhirendra Kumar explains why it is maybe the worst way to get mutual fund returns.
Mutual fund dividends need to die. They should be abolished and replaced by specially designed withdrawal plans that investors can choose according to their needs. That sounds like a radical suggestion but actually it’s not because financially, there is already no such thing as dividends in mutual funds. What are called dividends are exactly what I’m suggesting—withdrawal plans. Except that currently, they are misnamed dividends and are arbitrarily structured by mutual funds to suit their own ma …
The alternative I’m suggesting is simple. Currently, there are Systematic Withdrawal Plans (SWPs), by which investors can specify a certain amount that is withdrawn automatically every month and credited to their bank accounts. These are almost good enough, provided you take care to withdraw only up to 3-4% of the gains.
One pays taxes on the entire amount of divident, but if it is replaced by withdrawal you need to pay only on the profits and the extra taxes which you hold back still earn money for you, of course if the NAV goes up
Completely agree with you. To add more to it, the recent recategorization of the mutual funds was a golden opportunity for the investors to redeem/ switch to growth plans without any exit load. This window of opportunity was open for a month only, which has closed now.
Couldn’t agree more. I talk about this & some other important questions - like who decides on the dividend amount and what happens to the dividends earned from the underlying stocks - in this article on Everything you need to know about MF Dividends& Dividend Plans. It has relevant & recent info from 2019.
Shout out if you guys have any feedback or questions, happy investing!