Mutual fund dividends are payments made by fund houses to investors from the profits generated by the scheme. These dividends come from the interest earned on bonds, rental income from real estate assets, or capital gains from stocks held by the fund.
Mutual fund dividends are distributed based on the income generated by the underlying assets of the scheme and are subject to taxation as per the investor’s income slab.
How are dividends paid in mutual funds?
When a mutual fund declares a dividend, it is credited to the investor’s bank account linked to their folio. Investors can choose between two types of mutual fund schemes:
- Dividend payout option
The dividends are paid directly to the investor whenever the fund declares them.
- Dividend reinvestment option
Instead of receiving cash, the dividend amount is used to purchase additional units of the same mutual fund scheme.
What is the impact of dividends on NAV?
Once a mutual fund declares a dividend, the Net Asset Value (NAV) of the scheme reduces by the same amount. For example, if the NAV of a fund is ₹100 and a ₹5 dividend per unit is declared, the NAV will drop to ₹95 after the payout.
Can dividends be received for SIPs in mutual funds?
Yes, investors who opt for a Systematic Investment Plan (SIP) in mutual funds can receive dividends if they invest in a dividend-paying scheme. However, the dividend distribution depends on the performance of the fund and is not guaranteed.
Investors using an SIP calculator can estimate their returns but should remember that dividend payments are variable.
Four key points to understand how mutual funds pay dividends
Understanding how mutual funds pay dividends is crucial for making informed investment decisions. Here are four key points to keep in mind:
- Dividends are not additional returns
Many investors assume that dividends are extra income over and above their investment growth. In reality, dividends are paid from the fund’s profits, and the NAV of the fund reduces accordingly.
- Dividend frequency varies
Mutual funds may declare dividends on a monthly, quarterly, half-yearly, or annual basis, depending on the scheme’s dividend policy. However, fund houses are not obligated to declare dividends at fixed intervals.
- Dividend yield vs. growth option
Investors choosing between dividend and growth options should consider their financial goals. The growth option reinvests all earnings back into the scheme, leading to higher compounding benefits over time, whereas dividend payouts provide periodic liquidity but may limit long-term growth.
- SIP in mutual funds and dividends
Those investing through SIP in mutual funds should know that dividends are not related to SIP amounts. SIP ensures disciplined investing, but dividend payments depend on the fund’s profitability and policies.
Using an SIP calculator can help investors estimate wealth creation but does not account for dividend payouts.
Ending note
Understanding how mutual funds pay dividends is essential for making informed investment decisions. Dividends are not guaranteed and depend on the fund’s earnings, market conditions, and asset allocation.
They reduce the NAV and may not always be the best choice for long-term wealth creation. Investors using SIP in mutual funds should decide whether they prefer the growth option or the dividend option based on their financial goals.
Tools like an SIP calculator can help estimate returns, but they do not factor in the unpredictable nature of dividend payouts. Choosing between dividend and growth options should align with an investor’s need for liquidity and long-term financial planning.
