Investors all around the world are putting their money in the mutual fund dividend schemes. The cash flows from such investments help the investors in managing their expenses. This article is all about dividend option of mutual funds, scroll down to know everything about it.
Dividends are a part of the profits booked on the mutual fund holdings. It is also a source of regular income for some investors. Moreover, it reduces the net asset value of the mutual fund. Any mutual fund scheme, debt, equity or hybrid declare dividends for its unit holders from realized profits in its portfolios. The gains which are made from instruments by selling them at a price which is higher than the price at which they were bought or when the securities held in the scheme receive dividend or interest from the instruments held are the realized profits. Unrealized profits which came from the instruments are not accounted to pay the dividends.
Mutual funds can pay daily dividends, monthly dividends, quarterly or annual dividends. However, these criteria vary from scheme to scheme. One cannot guarantee about the dividend payment but most of them endeavor to pay dividend and stick to their respective mandate.
Dividends from mutual funds are tax free. But when it comes to the case of debt funds, the fund house must pay a dividend distribution tax which includes surcharge and tax. While in an equity mutual fund, there is no dividend distribution tax.
Financial planners usually advice dividend option for investors who require cash flows. Those investors, who are looking forward to building wealth over the long term through equity mutual fund using SIP, should opt for their growth options. The reason behind it is that the compounding benefit is lost when the dividend is paid, unless the amount is invested in a higher equity asset. Those people who are in the highest tax bracket investing for a time duration of less than three years, are allowed to opt for the daily dividend option in liquid/ ultra-short-term funds.
More information about the mutual fund dividend can be gained from researching online.