A dividend plan in mutual funds offers investors a way to receive regular income through fixed dividends, which are payouts from their holdings. Unlike growth funds, where profits are reinvested, dividends in this plan are distributed directly to investors’ accounts.
Major Points on Dividend Plans
- Tax Importance: Investors receive bonuses tax-free at the receiving end. However, a Dividend Distribution Tax is used for the mutual fund plans before the rewards are paid to investors.
- Bonus Stripping: This method lets investors leave the fund after acquiring rewards, potentially discovering a paper loss since the reward amount is subtracted from the Net Asset Value of the funds.
- Investment Approach: Bonus mutual funds concentrate on yielding revenue by financing stocks and bonds that deliver periodic bonuses. Fund managers pool up all these incomes and disperse them according to the fund’s guidelines, which may include monthly, quarterly, and even annual payouts
- NAV Impact: When dividends are paid out, the NAV of the fund typically decreases by an equivalent amount. For example, if a fund declares a 20% dividend on a face value of Rs. 10, each investor would receive Rs. 2 per unit, and the NAV would drop accordingly
Conclusion
Overall, dividend plans cater to investors seeking steady income while considering tax implications and potential strategies like dividend stripping.