Major mutual fund houses have been paying out dividends, especially on investments in equity and balanced fund categories. The gains netted by a mutual fund scheme are reinvested in the fund with the growth option. On the contrary, in a scheme with the dividend payout option, the gains are periodically distributed as dividend. Consequently, the NAV falls to the extent of the dividend paid out. A good dividend payout in uncertain markets will reassure investors and encourage them to stay invested longer.
How efficiently can the recent harvest of dividends be used by small investors? Can this haul be made to work harder for you? This largely depends on an investor's liquidity needs, financial constraints and risk appetite. The money can be used to clear unpaid dues, saving for contingency fund and meeting other personal financial obligations.
Some investment options for dividends you can explore:
Fixed maturity plan
They are predominantly debt-oriented schemes floated by fund houses. Their main objective is to generate steady returns over a fixed maturity period by investing in debt and money market instruments. Based on the investment tenure, they invest in a range of debt products of similar maturity dates.
Taxed at 10 percent without the indexation and 20 percent with indexation, it is an option that investors in the high tax bracket must consider. By way of indexation, inflation is taken into account when computing tax liability.
Fixed deposit
In the current high interest rate regime, the returns on fixed deposits are a lucrative 9-9.5 percent per annum. For those in the lower tax bracket, this is a safe bet. However, investors in the higher tax bracket need to shell out 30.90 percent of their earnings. This is less risky in comparison to fixed maturity plans and the returns are guaranteed compared to the latter.
With a high degree of safety and ample liquidity, the sheen on fixed deposits has reappeared as global uncertainties are adding to turbulence in the equity waters. Fixed deposits still remain the favorite of risk-averse investors who seek to augment wealth for their children's education, marriage, buying a house or for contingencies like medical emergencies.
Rebalance portfolio
Perhaps it is time to consider rebalancing your portfolio. Rebalancing involves periodically resetting the proportion of each asset class back to its original allocation percentage. Suppose an investor seeks 60 percent of the investments in equity and 40 percent in debt in line with his risk appetite. Over a period of time, let us assume the percentage of investments in debt fell to 30 percent owing to profits in equity investments that grew to 70 percent. This portfolio is not in sync with the investor's risk appetite and initial allocation.
While rebalancing, investors sell asset classes that have risen in value and buy other asset classes that have dipped. Investors can potentially increase returns when they are selling high and buying low during rebalancing.
So, if you have no unpaid debts and other pressing financial commitments, your dividend money can be better used in one of these investment options.
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