A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.
Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.
The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment company in the UK.
What is mutual fund dividend?
A dividend is a distribution of the earnings of a stock or mutual fund. In mutual fund schemes, dividends are distributed when the fund has recorded profits on the sale of securities in its portfolio.
According to the regulation, a fund can declare dividends only from the gains it has made from the sale of securities in the portfolio, or through any current income in the form of interest or dividends. These gains are transferred to a dividend equalization reserve and, at the discretion of the trustees, a dividend is declared.
Dividends are declared as a percentage of the nominal value of the scheme (PV) and not the NAV. If PV per unit is Rs. 10 and the dividend rate is 20%, each investor in the dividend option gets Rs.2 as a dividend. However, the NAV of the scheme shall fall by an equivalent amount after the declaration of dividends. Investors in the growth option are not entitled to the dividend, and the profit of the scheme is reflected in the scheme in this case. Therefore, the NAV of the growth option increases in contrast to the dividend option.
With effect from 01 April 2020, dividends from mutual fund schemes have been made taxable in the hands of investors. Investors who opt to pay dividends will now have to pay income tax on any dividend income received in a financial year at the highest income tax rate applicable to them. Investors who opt for dividend reinvestment will have no implication on their taxes since they receive the profit in terms of additional units allocated in their folio.
