top of page

Start Filing Your ITR Now

Our plans start from 499/-

Artboard 2 (1).png

Top Dividend Mutual Funds: A Comprehensive Guide

Mutual funds are a great investment option for investors looking to make money without doing the heavy lifting of managing their investments. A professional Fund Manager collects money from several investors with a unified investment objective and puts it in a mix of bonds, equities, money market instruments, and securities.

Essentially, mutual funds are segregated into growth mutual funds and dividend mutual funds depending on the treatment of the returns earned. In this guide, we will cover everything about the latter. Dividend mutual funds are the ones that pay regular returns in the form of dividends generated to the investors instead of reinvesting them.

Let us discuss everything you need to know about dividend mutual funds in detail and highlight the top monthly dividend-paying mutual funds.

Dividend Mutual Funds: Understanding How They Work

Dividend mutual funds pay regular dividends to investors, creating an income stream in the form of dividend payouts. The fund managers invest their money in stocks promising periodical dividends.

The returns you get are a trading profit, with your manager buying stocks at a lower price and later selling them at a higher price. The difference creates a profit, which goes into the Net Asset Value (NAV) of the fund.

However, the entire return on the Assets under Management (AUM) is never distributed as dividends. A part of it is reinvested to increase the corpus to ensure better returns in the future, which definitely makes sense.

How are the Returns on Dividend Mutual Funds Paid to Investors?

The payment frequency of dividends may vary from daily to monthly, quarterly, half-yearly, and yearly. The fund house decides this frequency from the outset and informs the investor about it beforehand. While the frequency of dividend payouts is fixed, you cannot expect the same for the rate and the amount of dividends. 

Dividend payments boil down to the performance of your mutual fund portfolio. You may make good money in a profitable market, but the fund might end up in a loss in a volatile market with falling prices. In this case, you may not get dividends despite the initial commitment. Therefore, there isn’t a guarantee of payment of dividends under dividend mutual funds.

What are the Factors to Consider While Investing in Dividend-Paying Mutual Funds?

A savvy investor always thinks twice before making investment decisions, and dividend-paying mutual funds are no exception. Here are the factors to consider before investing in them:

Investment Tenures

Start by understanding the duration of the investment tenure of the fund. From a return perspective, it is better to pick the funds that have witnessed the bull and bear phases of the market instead of investing in newer companies.

Risk Tolerance

If you seek portfolio stability, look for funds with a higher allocation to large-cap equities. These investments lower your risk by picking a portfolio with low hazards.

What are the Risks Related to Dividend-Paying Mutual Funds?

At this point, you should also understand the potential risks related to dividend-paying mutual funds to make an informed decision. Here are the threats you should be aware of:

Varying Returns Based on Performance

While dividend-paying mutual funds are less volatile, the returns on them vary according to portfolio performance. There is always a chance of getting nothing in a volatile market.

Inherent Risks

Liquidity risk, market risk, credit risk, and concentration risk are a few inherent risks of mutual funds you cannot overlook.

Incidence of Tax on Dividend-Paying Mutual Funds

While a dividend is an income, it is not subject to tax and is included in ‘income from other sources’ in tax calculations. This income does not get taxed because fund houses already pay tax on the dividends they distribute in the form of a Dividend Distribution Tax (DDT). The rate of DDT is–

  • Equity mutual funds: 11.648%, including surcharge and cess

  • Debt mutual funds: 28.84%, including surcharge and cess

Advantages of Dividend-Paying Mutual Funds

The best dividend-paying mutual funds offer several advantages to investors. These include:

Regular Income

As long as you choose reliable investments, you can rest assured about regular income from dividend-yielding funds. The underlying companies in these schemes often give regular dividends, leading to timely returns and stability.

Equity Exposure with Lower Risk

Market volatility has a relatively lesser impact on dividend yield mutual funds compared to other equity-oriented schemes. By investing in them, you will get the best of both worlds with equity exposure and higher returns. 

High Returns in the Long Run

Dividend yield funds often invest in shares of companies with robust financials and proven track records. It opens up the opportunity for high returns in the long run.

Frequently asked questions


Are dividend-yield mutual funds a good investment?


Dividend-paying mutual funds are an ideal investment for investors seeking lower risks and volatility. They may not be apt for aggressive growth seekers, but they definitely make a wise move for adding stability to your portfolio.


What is the exit load for dividend yield funds?


Exit load is the amount you will be charged when selling mutual fund units. The mutual fund scheme's parameters determine the percentage of exit load.


Can the dividends be reinvested in the fund?


Yes, the dividends declared by the underlying companies can be reinvested. However, it depends on the type of fund and guidelines and is at the fund manager's discretion.


Are dividend-paying mutual funds equity funds?


Dividend mutual funds may be equity and debt funds. Almost all types of schemes offer the dividend option if investors want regular incomes from their investments.


What is the difference between the Net Asset Value (NAV) of dividend-paying mutual funds and growth mutual funds?


Dividend mutual funds always have a lower NAV than growth mutual funds because it is not allowed to grow beyond a specific limit. The fund managers pay periodic dividends to reduce the NAV of dividend mutual funds.


Do you have to pay an extra charge to buy dividend-paying mutual funds?


No extra charge is applicable to buy dividend-paying mutual funds.


How much dividend income is tax-free?


When it comes to tax exemption on dividend income from dividend mutual funds, there is no limit. The total dividend is treated as a tax-free income.

Mutual fund Table.png

Top Dividend-Paying Mutual Funds in India

Prachi Jain

Chartered Accountant

Prachi Jain is a Chartered Accountant with a passion for simplifying finance and tax-related matters through her insightful and informative blogs. With a background in finance and a deep understanding of tax regulations, Prachi has established herself as a trusted source of financial wisdom. Prachi is committed to empowering her readers with the knowledge they need to make informed financial decisions. Her expertise and dedication shine through in every blog post, helping her audience navigate the intricacies of finance and taxes with confidence. Follow Prachi Jain's blog for practical insights and guidance on managing your finances effectively.

bottom of page