31 May 2020
1. What are dividend mutual funds? A dividend mutual fund primarily invests in companies that pay dividends. These dividends are mostly profits that the companies share with stockholders/shareholders. The profits are earned by selling the stocks at a price higher than the price they were purchased. The asset management company (AMC) adds these profits to the Net Asset Value (NAV).
On the other hand, AMCs cannot consider unrealized profits (when the profit is still on paper) from the instruments for paying dividends. However, sometimes they declare some part of unrealized gains as dividends. This decision is up to the fund manager. The asset manager also has the option to send the money back to buy stocks or debt instruments as per the scheme.
2. When are dividends paid to investors? The Asset Management Company can choose to pay dividends on a daily, monthly, quarterly or annual basis. This generally varies from one scheme to another. Even though most dividend mutual funds strive to pay dividends and stick to their respective mandate, it is never guaranteed. The dividend amount is never fixed. An investor must also understand that under the dividend option, the Net Asset Value is not allowed to grow higher than a specified value. Once the NAV reaches its critical value, the fund house pays out the dividends.
3. What are the tax implications of dividends? Dividends obtained from a mutual fund is tax-free in the hands of the investors. However, the fund house pays a dividend distribution tax (DDT) of 29.12% on debt funds. This is inclusive of surcharge and cess. On the other hand, in an equity mutual fund, there is no dividend distribution tax. For investors who are looking to have intermittent cash flow through moderate-risk investments, dividend equity funds could be the best bet. Also, there is no DDT on equities.
Investors can opt for growth or dividend option based on their investment goals. So, people who wish to grow wealth over the long term, usually opt for growth option – this is because the compounding benefit is lost when he AMC pays you dividends.
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