I am going to retire in another seven months and have a fairly good set of mutual funds that are worth Rs 25 lakhs. Would it be prudent to shift from the growth option to dividend option for some of the funds that I have to meet my expenses? Can you recommend some mutual funds which pay good dividend? Or, do you recommend that I stick to growth schemes and sell off some funds at a regular interval?
There is a perception that a company or a fund rewards investors when it declares a dividend. However, one should realise that declaring a dividend is at the discretion of the company or the fund. For instance for years Infosys, a company with good corporate governance and financial performance did not declare a dividend. What you need to realise is that in the case of equity mutual funds, dividends really do not matter because mutual funds are highly liquid and let you realise the gains from the investment whenever you need it than depend on dividends which may not necessarily be realised when you actually need it. Moreover, dividends will attract tax whenever the direct tax code comes into effect, taking away the sheen from this income source that you plan to depend on. As long as you redeem your investments one year from the time of investing; it will be tax free which is not only efficient, it also leaves the timing for generating income with you, when you need it.