1. Dividend mutual funds
A dividend mutual fund primarily invests in companies that pay dividends. These dividends are essentially profits that the companies share with stock or shareholders. They earn profits or gains by selling the stocks at a price higher than what they purchased for. The asset management company add 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 dividends are paid to investors
The Asset Management Company can choose to pay dividends daily, monthly, quarterly or annually. 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 amount too is often not a fixed one. An investor must also understand that under the dividend option, the Net Asset Value is not allowed to grow higher. That is, as soon as the NAV reaches a specific level, the fund house pays out the dividends.
3. Tax implications of dividend mutual funds
Dividends coming from each and every mutual fund is tax-free in the hands of the investors. However, fund house pays a dividend distribution tax (DDT) of 28.84% for 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 do not incline towards taking a risk in investments and also the others who are need a cash flow, dividend option in equity funds is quite suited for them. And there is no DDT on equities.
Investors can opt for growth or dividend option based on their investment goals. So, people who want to grow wealth over a long term, usually opt for growth option – this is because the compounding benefit is lost when he AMC pays you dividends. ClearTax Invest presents you with both the options with hand-picked funds from the top AMCs in India. Start investing.