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Are you looking for a dividend plan in a mutual fund? First, let us understand the concept of dividend option in a mutual fund.
Mutual funds provide two plans, namely
(1) Dividend Plan and
(2) Growth Plan.
Dividend mutual funds are those funds that invest in stocks that pay dividends. Investors can reinvest the dividends to buy more units of funds or use the dividend as an income stream.
A dividend is the share of the profit that the mutual fund company distributes to their unitholders. Please note that dividend in stock and mutual funds do not mean the same. For instance, if a company declares a dividend, it will be sharing its profits with the equity stockholders. This dividend income is over and above the stock price appreciation if applicable.
However, a dividend is a part of that particular mutual fund’s profits. Usually, when the mutual fund pays out dividends, NAV is reduced to the extent of payout, reflecting that cash has been taken out and paid to unitholders.
Let’s understand this using an example,
Suppose an equity mutual fund scheme declares dividend for its unitholders from the realised profit of the portfolio.
Realised profit means = Sale price of the units – Purchase price of units.
Please note that the mutual fund would not use the unrealised profit from securities or instruments for distributing dividends.
The unitholder can use the dividend to either buy more units or as a source of income. Most of the investors opting for dividend mutual funds are looking for a stable income. This type of scheme is best for risk-averse investors or retired investors.
An investor can buy a dividend plan in mutual funds through different methods, namely online, offline, direct or regular plans.