A quick guide on Mutual Fund Dividend

People want to invest both for growth and income and thus for such investors investing in mutual fund dividend could be a good option. But, before going ahead we should know what exactly dividend funds are and how helpful they can be to achieve your financial goals.

Mutual Fund and Dividends

Firstly, the distribution of earnings from a stock or a mutual fund is known as a dividend. It basically represents a portion of a company’s profits. These companies are such which have good financial holdings and thus they would often pass the portion of their profits in the form of dividend income. Therefore, under dividend funds, investors receive profit from the sale of securities included in the portfolio of the funds. Also, at times dividend is declared by fund through any current income in the form of interest or dividends. Mutual funds pay dividend monthly, quarterly and even yearly in order to avoid taxation.

Advantages of Dividend Funds

It is believed that dividend funds are largely suitable for those who are retired as they are good income generating schemes. Also, they are less risky in comparison to growth mutual funds. Additionally, in situations where interest rates are low but economic conditions are favorable, dividends funds are really a great choice.

Dividends can be used in both ways, either as a source of income or to purchase more shares of the mutual fund. However, in many cases, investors choose the first option with the aim of accomplishing their financial goals.

Calculation of mutual fund dividend

As per the law, Mutual funds are required to pay out all dividends or interest earned on the portfolio minus fund expenses. It is always calculated on the scheme’s face value and not NAV. The face value of the mutual fund is the amount paid by investors if they have bought a mutual fund through subscription. Generally, in every case, the face value is Rs 10. When mutual funds declare dividend they state for instance at 20%. This 20% means 20% of Face value Rs.10 i.e. Re.2 per unit of a mutual fund is investor’s dividend.

The tax under Dividend Funds

As per section 10(35) of Income Tax Act, any income received by an individual/HUF as a dividend from a debt mutual fund scheme or an equity mutual fund scheme is completely exempt from tax. However, dividends declared by companies attract a Dividend Distribution Tax (DDT).

Dividend distribution under debt mutual funds

Dividend or income distributed on debt mutual funds is subject to a dividend distribution tax for Individuals and HUF investors, at the rate of 28.33% which include surcharge and cess. It is deducted from dividend before the mutual fund credits dividend in the account of debt mutual fund investor.

Dividend distribution under equity mutual funds

In the budget of 2018-19, it was announced that dividend or income distributed on equity mutual funds is going to be taxed at 10%.

To conclude, dividend funds can be opted by investors who are looking for less risk with regular income. Investors need to decide if they are interested to accumulate wealth over the long-term. Mutual funds and dividend only work if your objective is to enhance your income stream. Technically, dividend funds are best suitable for people who are looking for some cash flows. Thus, think before going for dividend fund option.

Here's a little bit about myself. I've done a Masters in Economics and teach the subject to high school students. I am 32 years old and married to an investment advisor. A Dhoni fan who loves to play football! I am a sports enthusiast and a firm beli