 "A low-risk way to invest in equities")
The market has been on the rise for the past year and a half. If you are an investor in an equity scheme of a mutual fund and have opted for the dividend option, most likely, the dividend goes straight to your savings account.
This dividend can be put to better use if you opt for the dividend transfer plan (DTP) option offered by mutual funds. It allows investors to book profits and plough the profits in debt funds, which are expected to do well in a falling interest rate scenario. “The dividends can be parked in liquid or ultra short-term funds, which can give better returns than a savings bank account. It can even be parked in long-term bond funds, if the money is not needed immediately,” said Suresh Sadagopan, a certified financial planner.
DTP is offered by most mutual funds and allows investors to transfer dividends from a source scheme to a target scheme of the same fund house. In the above case, the source scheme is an equity scheme, while the target scheme is a debt scheme. Every fund house has a list of schemes that are eligible for DTP. Once the DTP mandate is submitted to the asset management company (AMC), it might take five to seven business days for the plan to get activated. Investors have the flexibility to stop this any time they want. The other good thing is that investors do not have to pay exit loads on the transfer of dividend or any switching charges.
For example, HDFC Mutual Fund unit holders who wish to enroll for the DTP facility are required to fill the fund house’s DTP enrolment form available with the investor service centres (ISCs), distributors/agents and on the fund house's website. The completed form can be submitted at any of the ISCs of HDFC MF. You need to tick on source and target schemes as listed in the enrolment form. Some of the sources and target schemes mentioned by the fund houses include HDFC Growth Fund, HDFC Equity Fund, HDFC Top 200 Fund, HDFC Capital Builder Fund, HDFC Balanced Fund, HDFC Short Term Plan, HDFC Gilt Fund, and HDFC Floating Rate Income Fund.
Experts believe the plan can be more useful to debt investors wanting to transfer their dividend payments to equity schemes. “This can be an ideal strategy for risk-averse investors as they are limiting their risk to the dividend portion, while keeping the larger part of their capital intact,” said Hemant Rustagi, chief executive officer, WiseInvest Advisors. To begin with, the dividends can be parked in index or large-cap funds, which are less riskier than mid- and small-cap funds or sectoral funds.
DTPs are mostly done in ultra short-term funds where the dividends are paid out monthly, quarterly, half-yearly or annually. “Dividend payouts in medium- to long-term bond funds are not as regular as ultra short-term bond funds. So investors generally opt for the latter,” said R Sivakumar, head of fixed income at Axis MF.
Debt investors should note that they will have to pay a dividend distribution tax at 28.84 per cent on the dividend received. So, if a debt fund were to pay out Rs 100 as dividend, the investor will pocket only Rs 71.16. “This will especially pinch those who fall under the lower income tax slab,” said Sadagopan. According to Sivakumar, systematic transfer plan (STP) is a better way of transferring money from debt-to-equity schemes as the effective tax on STPs are much lower. Also, unlike DTP, one can give instructions on the exact amount that needs to be transferred to equity schemes.
Experts caution this strategy could backfire if used arbitrarily. “I would advise investors to refrain from using equity to debt transfers, except for parking their money for the short-term. In the long run, investors will miss out on the upside that equities can offer. What’s more, dividend payouts in equity schemes are not as regular as debt schemes,” said Sivakumar.
This dividend can be put to better use if you opt for the dividend transfer plan (DTP) option offered by mutual funds. It allows investors to book profits and plough the profits in debt funds, which are expected to do well in a falling interest rate scenario. “The dividends can be parked in liquid or ultra short-term funds, which can give better returns than a savings bank account. It can even be parked in long-term bond funds, if the money is not needed immediately,” said Suresh Sadagopan, a certified financial planner.
DTP is offered by most mutual funds and allows investors to transfer dividends from a source scheme to a target scheme of the same fund house. In the above case, the source scheme is an equity scheme, while the target scheme is a debt scheme. Every fund house has a list of schemes that are eligible for DTP. Once the DTP mandate is submitted to the asset management company (AMC), it might take five to seven business days for the plan to get activated. Investors have the flexibility to stop this any time they want. The other good thing is that investors do not have to pay exit loads on the transfer of dividend or any switching charges.
For example, HDFC Mutual Fund unit holders who wish to enroll for the DTP facility are required to fill the fund house’s DTP enrolment form available with the investor service centres (ISCs), distributors/agents and on the fund house's website. The completed form can be submitted at any of the ISCs of HDFC MF. You need to tick on source and target schemes as listed in the enrolment form. Some of the sources and target schemes mentioned by the fund houses include HDFC Growth Fund, HDFC Equity Fund, HDFC Top 200 Fund, HDFC Capital Builder Fund, HDFC Balanced Fund, HDFC Short Term Plan, HDFC Gilt Fund, and HDFC Floating Rate Income Fund.
Experts believe the plan can be more useful to debt investors wanting to transfer their dividend payments to equity schemes. “This can be an ideal strategy for risk-averse investors as they are limiting their risk to the dividend portion, while keeping the larger part of their capital intact,” said Hemant Rustagi, chief executive officer, WiseInvest Advisors. To begin with, the dividends can be parked in index or large-cap funds, which are less riskier than mid- and small-cap funds or sectoral funds.
DTPs are mostly done in ultra short-term funds where the dividends are paid out monthly, quarterly, half-yearly or annually. “Dividend payouts in medium- to long-term bond funds are not as regular as ultra short-term bond funds. So investors generally opt for the latter,” said R Sivakumar, head of fixed income at Axis MF.
Debt investors should note that they will have to pay a dividend distribution tax at 28.84 per cent on the dividend received. So, if a debt fund were to pay out Rs 100 as dividend, the investor will pocket only Rs 71.16. “This will especially pinch those who fall under the lower income tax slab,” said Sadagopan. According to Sivakumar, systematic transfer plan (STP) is a better way of transferring money from debt-to-equity schemes as the effective tax on STPs are much lower. Also, unlike DTP, one can give instructions on the exact amount that needs to be transferred to equity schemes.
Experts caution this strategy could backfire if used arbitrarily. “I would advise investors to refrain from using equity to debt transfers, except for parking their money for the short-term. In the long run, investors will miss out on the upside that equities can offer. What’s more, dividend payouts in equity schemes are not as regular as debt schemes,” said Sivakumar.