How to Make Money by Investing in Mutual Funds?

How to Make Money by Investing in Mutual Funds

Many people out there want to invest in Mutual funds and make more money for themselves. But they don’t know what are benefits of mutual funds or they don’t know how to invest in mutual funds. On the other hand, there are people who know the benefits of mutual funds and how to invest in mutual funds but do not know how to make money in mutual funds.

Investing in mutual funds is simple & not rocket science, similarly to make money from mutual funds is as easy as investing. You can make money from Mutual funds in three ways by Dividend Payout, Dividend Reinvestment and Capital Appreciation. Let us understand all three of them in detail and find out which is the best for you.

A) Dividend Payout

The most simple method to make money from mutual funds to invest in dividend schemes and receive cash payments in your bank account whenever the dividend is declared. Normally mutual funds, declare a dividend at the end of the financial year, the dividend is declared per unit. You just need to invest in Dividend Option to be eligible for a dividend.

Advantages of Dividend Payout

1) Dividend Payout is a good way to earn passive income on your investment.

2) Dividend declared is market-linked, means if the market has performed well you will make an excellent dividend income that year.

3) Dividends received up to Rs.10 Lakhs are tax-free in the hand of investors.

Disadvantages of Dividend Payout

1)Dividends are tax-free in the hands of the investor, but mutual funds before paying dividends have to pay DDT (Dividend Distribution Tax) at present DDT of 17.65% (15% Tax + 12% Surcharge + 4%Cess) has to be paid out of the dividend declared.

Source – Wikipedia

2) Dividends Received from mutual funds are taxed at 10% if it crosses Rs.10 Lakhs in a financial year. So If you earn more than Rs.10 Lakhs dividend in a year, your dividend income will double-taxed by DDT & your personal income tax as well.

3) Dividends from mutual funds are not consistent as they market-linked, in a bull year there might be no dividend paid as well.

4) There is no Capital Appreciation in dividend payout schemes as all profit is paid back to the investors.

Who Should Select Dividend Payout Option

Investors who are looking for passive income from mutual funds & have a moderate risk capacity with Other dividends income less than Rs.10 Lakhs per year should go for Dividend Payout Option.

B) Dividend Reinvestment

Dividend Reinvestment is another form of a dividend scheme where the dividend is not paid to investor but reinvested in the same scheme, where the investor gets more units of the scheme for the dividend amount. The investor gains by getting more units in the same scheme.

Advantages of Dividend Reinvestment

1) It helps in accumulating units in the scheme, which helps in capital appreciation over a period of time.

Disadvantages of Dividend Reinvestment

1) Like Dividend payout, DDT at applicable rates is to be paid in Dividend Reinvestment as well. DDT eats a chunk of your profit which means fewer returns to you as an investor.

2) Dividend Reinvestment is not suitable for either dividend payout (because it does not pay a dividend) or Capital Appreciation as NAV doesn’t increase only units keep on increasing.

3) If your dividend income in any financial year is more than Rs.10 Lakhs, then your reinvested dividends would be taxed at 10%.

Who Should Select Dividend Reinvestment

In Reality, Investors should not select this option because if you are looking for passive income you should select dividend income then you should select dividend payout option & If you are looking for Capital Appreciation then you should invest in Growth Option.

C) Capital Appreciation / Growth Option

Capital Appreciation/Growth Option is an Option where you invest in mutual funds, received units and over the period of time the value of your units rise and you make money when you sell units at a higher price. This is similar to investing in shares where you make money when the price of your share rises.

Advantages of Growth Option

1) You can Create Wealth in Growth Option over a long period of time, where you invest and all the gains are reinvested in the scheme and compounding effect takes its place.

2) No DDT is to be paid on Growth Option as no dividend is paid, which protects your returns from taxes.

3) No Taxes on Bookish gains, If you invest at Rs.40 and price rises to Rs.45 there is no tax to be paid until you actually sell the units.

4) Tax is to be paid only when the actual sale of units is done. For mutual funds units held for less than 1 Year tax is to be paid at 15% of Gain & for Units held for more than 1 Year are taxed at 10% on Capital Gain (No Tax Upto Rs.1,00,000 Gain)

Disadvantages of Growth Option

1) No Passive Income is received from these Schemes

Who Should Select Growth Option

Investors who are looking for Capital Appreciation over the long term should select Growth Option. You can link you various goals such as retirement, child education and vacation to each investment and sell investment once the goal is achieved.

Bonus Tip:- Whenever you are investing in mutual funds always invest in direct plans. You can read the difference between direct and regular plans & how to switch from regular to direct plan.

Hope you are able to understand how to make money from mutual funds in various ways, invest in ways which suit your investment approach and risk appetite. If you have any questions do let us know in the comments section below and Thank You very much for reading this article.

7 thoughts on “How to Make Money by Investing in Mutual Funds”

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