Do mutual funds have dividend plans?
The answer is yes!
In order to understand how one can buy a dividend plan for a mutual fund, it is important to first understand the concept of a dividend plan and what a dividend option means in a mutual fund.
Basically, dividend mutual funds are stock mutual funds that invest primarily in companies that pay dividends.
This is basically the profit that the company distributes to their shareholders.
Let’s take the example of an equity mutual fund scheme or a debt scheme. A dividend can be declared for the unitholders of the scheme and this dividend will be declared from the realized profit of the portfolio.
By realized profit I mean the gain that is made from selling instruments at a price that will be higher than the purchased price of the instrument.
It is also to be noted that unrealized profit generated from securities or instruments held in the portfolio will not be used to pay dividends.
Depending upon the unitholder, dividends can be used as a source of income or they can also be used to buy more units of the mutual fund.
Majority of the investors who buy dividend mutual funds are usually looking for a stable source of income.
This scheme is best suited for retired investors who tend to be risk-averse.
This is because dividend mutual fund schemes are less aggressive than other types of funds such as growth stock mutual funds.
How can you invest in such funds?
An investor can invest via different methods like online or offline and direct or regular plans.
You can buy dividend mutual funds through a direct plan, but there are chances that you will be paid a different dividend that is usually smaller than a regular plan
Lately, there have been talks going on with SEBI in order to get investors equal dividends in both regular and direct plans.
IFAs or Independent Financial Advisors are individuals who act as agents in order to facilitate a mutual fund investment.
Just like the intermediaries, they help you fill out the application form and submit the same with the Asset Management Company or the AMC.
Instead of going to intermediaries or IFA’s, you can choose to invest in a mutual fund scheme directly investing through the AMC.
The first time you might have to go to the AMC’s office.
Once that is done, future investments in the schemes will be made available online using the folio number in your name.
Banks act as intermediaries that distribute fund schemes of different AMCs. You can invest directly at your bank branch.
If you have a Demat account, you can buy and sell mutual fund schemes through them
This is where you need to pay attention.
Through online, paperless websites like Groww, you can invest in mutual fund schemes across various AMCs.
Portals such as these have tie-ups with banks in order to facilitate easy fund transfer at the time of investing.
A dividend mutual fund has a portfolio that includes a dividend-bearing stock, an interest-bearing bond, or both simultaneously.
A bond generally pays a fixed rate of interest each year, which is known as a coupon payment. This is equal to an already determined percentage of the face value of the bond.
In order to avoid taxation, mutual funds are required to give shareholders the net income, so that interest generated by debt securities such as bonds, bills and notes are distributed to shareholders via dividend payments.
But unlike bonds, stock dividends are not always guaranteed. Many companies choose to pay annual cash dividends to reward only the long-term shareholders and to encourage new investors.
A mutual fund that invests in dividend stocks, therefore, passes along that earning to its shareholders each year.
A mutual fund dividend distribution includes both the interest and dividend income.
As far as the goal of a mutual fund is concerned, some mutual funds are managed only with the goal of generating significant dividends to pay current income to investors with moderate risk tolerance capacity.
While others that are primarily growth-oriented, simply pay moderate dividends as a result of a handful of investments.
In both cases, investors who research dividend funds are required to know whether or not dividends are being reinvested in historical returns that they see on the fund fact sheet.
Most funds that pay dividends on preferred stocks and common stocks usually pay them on a quarterly basis.
But there are mutual funds that prefer paying dividends on a semi-annual basis and a few those issue dividends each month.
There is a legal provision for the funds to distribute their accumulated dividends at least once a year. Those that are aimed toward current income, pay dividends on a quarterly or even monthly basis.
However, funds, in order to minimize administrative costs, pay dividends on an annual or semi-annual basis.
Some funds may withhold dividends in certain months and then pay them eventually in later months so as to achieve a more level distribution of income.
There are some equity funds that pay dividends on a quarterly and annual basis as well. However, investors need to keep in mind that dividends are not certain and the amount is not fixed.
Now, an obvious question arises.
What happens to the NAV once the dividends are paid?
In order to understand this concept, let us assume that you have invested in a fund at the NAV of Rs.100 and this fund is a dividend mutual fund.
Suppose the scheme performs well and after appreciation, the current NAV reaches Rs.116. The fund house may decide to pay Rs.16 as a dividend.
Simultaneously the NAV will fall back to Rs.100. So the NAV gets readjusted to the original NAV once the dividend is paid.
If the scheme doesn’t perform, then there are no realized profits and there will be no dividend payment either.
This process is uniform across various SEBI regulated intermediaries in various security markets such as mutual funds, depository participants, stockbroking and many other markets.
This ensures that a single KYC eliminates the chance of duplication of the KYC process across the above-mentioned intermediaries, making investing more investor-friendly.
Documents required to be submitted along with the KYC application are as follows
The investor will also have to submit copies of all the above-mentioned documents by self-attesting them and accompanying them along with originals for verification.
In case original documents cannot be produced for verification for whatsoever reason, then the copies will have to be properly attested by entities that are authorised for attesting the documents.
Notary public, Gazetted Officer, Manager of a scheduled commercial/co-operative bank/multinational foreign banks.
Make sure the name, designation and seal are affixed on the copy.
Authorised officials of overseas branches of scheduled commercial banks registered in India/ notary public/court magistrate/judge/ Indian Embassy in the country where the client resides.
Now, this is one question that depends largely on the investor as each one of them has different financial goals.
Some might be looking to build wealth over a long period of time while others might be looking for regular cash flows. If you are looking for regular cash flow then opting for a dividend mutual fund scheme will be better for you as they will pay you cash on a regular basis.
Also, a dividend option is well suited for less aggressive investors and you can opt for it if you are not a risk-taker.
But, if you have big aspirations and want to build wealth over a long period of time then you should choose SIP in equity funds.
The reason for this is SIP in equity funds has a compounding effect on your finances and you will be able to reach your goals much earlier.
Disclaimer: The views expressed in this post are that of the author and not those of Groww