How Do Mutual Funds Pay Dividends: A Complete Guide

Mutual funds have emerged as one of the most popular investment options for investors in India. With the right mutual fund investment, investors can steadily grow their wealth. One of the ways mutual funds generate returns is through dividends.

Understanding the relationship between mutual funds and dividends is important. Especially for investors seeking regular income from their investments. Mutual funds distribute dividends from the income they earn through interest, stock dividends or realised capital gains.

But how exactly do mutual funds pay dividends to investors? Read on to find out.

What are Dividends in Mutual Funds?

Dividends are payments made by companies to their shareholders from the company’s profits. Similarly, mutual funds pay out dividends from the profits they make in their portfolio investments. For example, if the stocks held by an equity mutual fund in its portfolio pay dividends, these dividends are passed on to the mutual fund investors.

Many investors often ask, ‘Do mutual funds give dividends?’ The answer is yes — mutual funds earn income in the form of dividends or interest from their investments and they distribute this income to the mutual fund unit holders. So, buying units or shares of dividend-paying mutual funds can provide investors with a steady income.
However, it’s important to note that dividend payouts depend on the performance of the underlying assets and are not guaranteed.

Who is Eligible for Mutual Fund Dividends?

All investors who hold units of a mutual fund on the record date are eligible to receive the mutual fund dividend payout. The record date is the cut-off date set by the mutual fund to determine which unit holders are entitled to dividends.

Mutual fund dividends are usually announced in advance by the fund house. So, investors should track dividend announcements from their mutual funds.

Also Read: Types of Mutual Funds in India

Important Things to Know About Mutual Fund Dividends

• Dividends are not guaranteed: Mutual funds declare dividends at their discretion. The payouts may vary from year to year, depending on the fund’s performance.
• Dividends can be stopped: If the fund is not earning profits, it can stop dividends at any time.
• Dividend reinvestment happens at NAV: In case of reinvestment option, units are allotted at the prevailing NAV and not the original purchase price.
• Dividends are taxed: Dividend income from mutual funds above ₹5,000 in a financial year is taxable as per the investor’s tax slab.
• Dividends reduce NAV: When funds pay dividends, the NAV of the fund drops to the extent of the mutual fund dividend payout.

How are Mutual Fund Dividends Calculated?

Mutual fund dividends are decided based on the distributable surplus available. Some key points on mutual fund dividend calculation:

• Dividends are paid out of net income earned by the mutual fund scheme. This includes interest, dividends and realised capital gains.
• The fund deducts all applicable expenses to arrive at the distributable surplus.
• The dividend per unit is calculated by dividing the distributable surplus by the number of units outstanding on the record date.
• Dividend payout reduces the mutual fund’s NAV in proportion to the dividend paid.

Investors looking to benefit from upcoming dividends in mutual fund schemes should keep an eye on the record dates and dividend announcements. Since dividends impact the NAV, understanding the timing and calculation of these payouts can help in making informed investment decisions.

Conclusion

Mutual fund dividends provide investors with a way to earn regular income on their investments. Analyse the dividend history for mutual funds, portfolios, performance track record, expense ratio and risk aspects before investing.

Holding mutual funds can also help you get instant cash whenever you need it with Fibe Loan Against Mutual Funds. Get up to ₹10 lakhs within minutes and pay only interest. Don’t worry, your investment growth will continue while you fulfil your instant credit needs. Download the Fibe App today!

FAQs on Mutual Fund Dividend Payout

What should I consider when choosing high-dividend investments?

When choosing high-dividend mutual funds or stocks, look at their dividend payout history over 5-10 years to see consistency. Ensure that the dividend yield is higher than prevailing bond yields and sector averages. Evaluate the underlying assets generating income in case of funds. Opt for low-cost index funds with fewer fees and check diversification across sectors and market caps. You can pick financially stable companies with steady dividend growth to invest in.

Can I reinvest dividends from high-dividend mutual funds?

Yes, most mutual funds let you reinvest dividends automatically to buy more shares of the fund. This compounds your investment growth over time since the additional shares earn more dividends. Another benefit is that reinvested dividends are not considered taxable income for that year. The reinvestment also happens automatically without effort through dividend reinvestment offered by the mutual fund.