Looking at your dividends from mutual fund investments

Arnav PandyaThere are a lot of investors who rely on some form of regular income to meet their regular requirement of funds. For this type of investors the debt instrument options are one of the best choices in terms of ensuring that they have a regular and steady flow coming in but the downside to this is that there is an element of tax inefficiency that comes into play. Many investors thus switch to dividend payments for meeting some of their needs and that too the dividends from equity oriented funds as these are more tax efficient for them. There is a risk in relying on such payments for the purpose of some requirements and hence here is a look at how this strategy would turn out.Equity fund efficiencyDividends that are received in an equity oriented mutual fund are extremely tax efficient. An equity oriented fund is one where on an average 65 per cent of the assets of the fund are in equity shares of domestic companies. The dividend that is received from such a fund is tax free in the hands of the investor thus this does not have any tax liability for them. However what is more important is the fact that there is also no dividend distribution tax that has to be paid by the mutual fund on the payment of dividends in such equity oriented funds. This translates into the fact that there is no indirect impact on the investor due to such dividends as there is no adjustment of this tax in the net asset value of the fund.High dividendsOne of the benefits of investing in an equity oriented fund is that there can be a high payout in terms of dividend in good years. This could push up the amount received on this front quite high and the simple way to understand this is that it is earnings of the fund that are coming to the investor. Thus higher earnings due to a good performance from the equity markets will clearly translate into a strong benefit but this has to be seen in perspective. When one is looking at a dividend strategy then the investor should never calculate the dividend in a good year as the average amount that they would receive. This is because the equity dividend paid by the mutual fund would vary significantly and this could throw such planning completely out of the window.Provide for smaller amountsThe best strategy for an investor would be to consider a part of the dividends that they receive as being certain because most equity oriented funds would still try and ensure that they pay out a dividend once a year. The key part is the extent of the dividend that one would consider for the purpose of the planning. This should be a very conservative amount because the chances are very high that a down year would be seen at regular intervals and in those times even when a fund decides to continue to pay the dividends then it will reduce the figure significantly. This means that there has to be a deep cut in the expectations for an individual. One of the best ways for a person to see what might turn out going ahead is to look at how the mutual fund scheme reacted when the times were very bad in 2009 and then again a few years later. The ability of the fund to hold on to a certain level of dividend payments would be a good sign and this should be a thing to look out for.