Sometimes, in order to cater to some inevitable expenses, investors prefer an intermittent cash flow from their investments and that is when they opt for dividend mutual funds. But there is another reason why investors opt for it and that reason is more significant than the former.
What is dividend mutual fund?
A dividend mutual fund is a stock mutual fund that primarily invests in companies that pay dividends, and these are typically profits that the companies share with stock the shareholders. These realised profits are the gains made by the mutual funds scheme from instruments by selling them at a price higher than what they were purchased for. On the other hand, unrealised profits from the instruments held cannot be considered for paying dividends and these profits are added to the NAV. However, some part of this can be declared a dividend, depending on the fund manager.
Also, the fund manager also has the option of sending the money back to buy stocks or debt instruments as per the scheme.
When to expect dividends in a mutual fund scheme?
Dividend mutual funds can be paid a daily, monthly, quarterly or annual basis, as it can vary from one scheme to another. Even though most dividend mutual funds endeavour to pay the dividend and stick to their respective mandate, the dividends and the amount is not certain. One must also understand that under the dividend option, the NAV is not allowed to grow higher, and as soon as it reaches a specific level, the fund house pays out the dividends.
Are dividend mutual funds taxed?
Dividends coming from each and every mutual fund is tax-free in the hands of the investors. But in the case of debt funds, the fund house pays a dividend distribution tax (DDT) of 28.84%, which also includes surcharge and cess. On the other hand, in an equity mutual fund, there is no dividend distribution tax.
Is dividend mutual fund a good option?
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. But for those who want to grow wealth over a long term, they should opt for the growth option, as the compounding benefit is lost when the dividend is paid.