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Dividend and its Distribution for Mutual Funds
If you buy a stock, you become a minute owner of a stake in the company, which means you have the right to earn the company's profits. The profits will be distributed through dividends to you.
What is Dividend in Mutual Funds
The dividend rate is determined by the company and the amount you earn is directly proportional to the amount of money you invest in the company. Typically, dividends are paid as and when the company reports earnings and makes a profit.
Dividends are given as and when the fund house is making a profit in the case of mutual funds. But you need to opt for the dividend option in this case. Or else you'll get an appreciation of capital because of the price increase of the units you've been issued.
Ways to distribute Dividends for Mutual Funds
Dividend Payout RecommendedThe dividend is credited directly to your bank account in this situation. This approach is only useful if you need to have a regular cash flow. But the unit price is not supposed to grow too much in this case.
Dividend Re-investment RecommendedThe amount of dividend is used in this method to purchase new units for you. This is entirely similar to the growth plan of mutual funds and helps in the appreciation of future capital.
When Dividend is paid to investors
The mutual fund houses may choose to pay dividends on a daily, monthly, quarterly or yearly basis. This normally varies from scheme to scheme. Although most mutual funds with dividend option are striving to pay dividends and uphold their respective mandate, it is never guaranteed. The amount of the dividend will never be fixed. An investor must also understand that the Net Asset Value cannot grow higher than a specified value under the dividend option. The fund house pays dividends once the NAV hits its critical value.
Taxation on Mutual Fund Dividends
Dividends from a mutual fund are tax-free in the investors' pockets. The fund company, however, charges a 29.12 percent dividend distribution tax (DDT) on debt securities. It includes a surcharge and a cessation On the other hand, there is no dividend distribution tax in an equity mutual fund. The best bet could be equity mutual funds with dividend option for investors looking to have intermittent cash flow through moderate-risk investments. There is also no DDT on equities.
Based on their investment goals, investors can opt for growth or dividend option. So, people who want to grow wealth in the long run usually opt for growth option – this is because when mutual fund houses pay you dividends, the compounding benefit is lost.