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.

What is a Dividend plan in mutual funds?

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.

Modes to buy dividend mutual funds

An investor can buy a dividend plan in mutual funds through different methods, namely online, offline, direct or regular plans.

  1. Direct Plan: Dividend mutual funds can be brought through a direct plan. A direct plan is where you invest directly with the AMC without a distributor or agent’s help. 
  2. Regular Plan: A regular plan usually has an intermediary between the investor and the AMC. The intermediaries can be brokers, advisors or distributors. Intermediaries typically charge a fee from the fund house, which is considered an expense by the mutual fund. There is usually a difference between a dividend payment from a direct plan and a regular plan. As in a regular plan, the mutual fund company pays a commission to the intermediary, which is deducted as an expense from the plan. Hence, as the expense ratio is higher in a regular plan, returns are less than the direct plan.  
  3. Independent Financial Advisors: Independent Financial Advisors (IFA) are individuals who act as agents to facilitate a mutual fund investment. They will help you fill and submit the mutual fund application form with the Asset Management Company, just like intermediaries.
  4. Banks: Many banks function as distributors to some of the AMCs and offer mutual funds to their account holders through the internet banking facility. You can invest directly through internet banking or filling up an application at your bank branch.
  5. Online Trading Account: If you have an online trading/Demat account, the purchase and sale of mutual fund schemes can be made quickly through them.
  6. Online Distributors: Online distributors, like ClearTax, can invest in various mutual fund schemes through BLACK across multiple AMCs. Online portals have tie-ups with banks to facilitate easy fund transfer at the time of investing.

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