Why dividend in a balanced fund is fundamentally flawed?

2. The dividend declaration is subject to availability of dividend surplus and at the discretion of the Fund House

3. If an investor has a specific inflow in a particular interval, it may not be prudent to depend on dividends to fulfil the same as funds would pay dividends as per their surplus

4. Hence there could always be a mismatch between their required cash inflow and dividend paid.

The stock market went through a turbulent phase in 2018 and naturally, the schemes had difficulties in paying monthly dividends as generating surpluses became a challenge. This became difficult for investors who rely on monthly dividend options to meet their monthly expectations. On top of that, the Budget of 2018 proposed to introduce dividend distribution tax (DDT) in case of equity mutual funds which led to investors bleeding further. This is where there seems to be a big mismatch between the investor expectation and what they have got in return.

So, the question still remains- “Is it possible to get fixed cash flow in a Hybrid Fund?” The answer to this might lie in the Systematic Withdrawal Plan option also popularly known as SWP. The concept here is simple the investor invests a lump sum amount in a Hybrid Fund Scheme. The investment is made into the Growth Option. The investor has the flexibility to decide on the monthly amount he wishes to withdraw of the entire corpus invested in the scheme. The advantage here is the monthly cash flows remains fixed and as per his requirement and investor does not have to worry about the uncertainty in the monthly income. The best part is that most of the schemes allow SWP upto a certain part of the corpus to be tax-free. The SWP mode of withdrawal is sustainable over long periods when the SWP amount is a small part of your corpus (ideally 0.75 percent-0.85 percent monthly as illustrated below) of the total invested amount.

At the beginning of the process, the investor has to know how much of monthly inflow is required. With the help of an advisor, one should come to a conclusion on the possible return expectation of the fund. This would help in ascertaining the amount of money to invest in order to get the desired monthly inflow. Let us look at the following possibilities:

Investors seeking fixed monthly income should therefore also look for SWP as an option as compared to monthly dividends, where the amount lies in the hand of the Mutual Fund Houses and not in the hand of an individual investor. Moreover, dividends are Taxable whereas an SWP of 15 percent annually is free from tax and applicable exit loads.

Happy Investing!