Embarking on the journey as a mutual fund investor can be both overwhelming and exhilarating. As you deep dive into the market investing landscape, one aspect that raises questions is dividends earned on mutual funds. In case, you are unaware of the mutual fund dividends option, do not worry, here’s a guide to make you understand all about it.
What is the dividend option in mutual funds?
A dividend option in a mutual fund refers to the distribution of the mutual fund scheme’s profit to its investors. Such dividends are derived from the income generated by mutual funds, which often are in the form of dividends from stocks, capital gains or interest. The primary goal of distributing the dividend is to offer you a regular income.
What are the distinct kinds of mutual fund dividends?
- Regular dividends
As per this category, dividends on mutual funds are distributed at specific intervals such as semi-annually, monthly, quarterly, or annually. Note that, if you opt for the regular dividend option, you will receive a fixed percentage of the scheme’s NAV (net asset value) according to the dividend rate declared.
- DRIP (Dividend reinvestment plan)
As per DRIP, instead of receiving the dividends in the form of cash, you get the choice to reinvest the received dividends into the scheme. This reinvestment permits you to acquire additional units of the fund scheme at the existing NAV. This potentially results in compounding returns over time.
What are the parameters impacting the dividends earned on mutual funds?
- Fund performance
Dividends of mutual funds are dependent on the mutual fund’s performance and distributable surplus availability. Higher profitability and stronger fund performance enhance the likelihood of earning regular dividend payouts.
- Investment objective
Mutual fund schemes’ investment objectives even impact the dividend payout. Equity-linked funds tend to distribute the dividends depending on dividend income generated from the underlying stocks while debt-linked funds might depend on the interest income.
- Dividend declaration
The dividend declaration is completely at the discretion of the fund’s AMC (asset management company). The AMC factors in distinct parameters like the fund’s NAV, market conditions, and distributable surplus before declaring the dividend.
What are the factors you must consider for investing in a dividend-generating mutual fund scheme?
- Evaluate your income requirements
Before you invest in a mutual fund generating dividend returns, ensure to assess your income needs and crucial financial goals. Dividend-linked mutual funds might be the preferred option if you look for regular income while growth-linked funds are the best match if you have the objective to create long-term wealth.
- Consider fund consistency
Ensure to research the previous dividend payout record of the preferred mutual fund. Consistency in the distribution of dividends indicates reliability and stability.
- Diversify your investment portfolio
Do not invest all your investible in a single dividend-paying fund scheme. Diversification across various schemes and asset classes helps meet the risks and increase the overall returns.
- Check the expense ratio
Assess the mutual fund scheme’s expense ratio. A lower expense ratio infers higher returns on investment.
Conclusion
Dividend options in mutual funds play an important role in generating regular income. By better understanding the nuances attached to mutual fund dividends, you can make an informed investment decision in alignment with your crucial life goals and risk tolerance level. Note that, if you are unsure with how you must proceed with investing in a dividend mutual fund, then you must approach an investment planner to earn the desired dividend pay-out and optimise your market investment journey better.
