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    Dividend yield funds could attract investors

    Synopsis

    For High net worth investors (HNIs) putting directly into stocks, the dividend income earned will be taxed as per his tax slab, with the highest rate being 42%.

    Analysts believe the quantum of gains could be higher in dividend yield funds, which primarily invest in a portfolio of companies that pay a high dividend.

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    Affluent investors usually prefer putting money in stocks directly rather than investing in mass products like mutual funds. But, after the proposal in the recent Budget to tax dividends at the hands of investors, they may have a reason to consider mutual funds especially dividend-yield schemes. This is because dividends that share portfolios of mutual fund schemes receive from companies are not taxed.

    For High net worth investors (HNIs) putting directly into stocks, the dividend income earned will be taxed as per his tax slab, with the highest rate being 42%.

    “There is a tax arbitrage in favour of mutual funds,” said Kaustubh Belapurkar, Director (Fund Research), Morningstar India. The dividends that mutual funds receive in their portfolios is different from the ones they give their unitholders. Mutual funds invest in shares of companies on behalf of the investor, who gets units representing the share portfolio. Dividends given by companies gets added as units for holders.

    Analysts believe the quantum of gains could be higher in dividend yield funds, which primarily invest in a portfolio of companies that pay a high dividend. Certain PSU funds where the dividend payout is large could also see interest from affluent investors. A dividend yield fund typically builds a portfolio of high dividend paying companies. Typically, during a downturn, dividend yield fund returns tend to fall less than those of growth-oriented funds. The high dividend yield acts as a barrier and in tough times, prevents these funds from falling beyond a point. On the flip side, in rising markets, they tend to underperform growth funds.

    “Typically an HNI investor paying 42% tax looking for a portfolio of dividend paying companies, would be better off buying a dividend yield fund,” says Rupesh Bhansali, Head (Distribution), GEPL Capital. He recommends Aditya Birla SL Dividend Yield Fund and UTI Dividend Yield Fund.

    Bhansali said that an investor can buy the growth option of an equity mutual fund scheme. The dividend paid by companies in the portfolio will be added to the net asset value (NAV) of the scheme which will go up subsequently.
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    The Economic Times