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Financial Term of the week- Dividend

Do you remember dividend letters coming home at a time when mutual funds did not exist, and people invested in shares alone? This is how it used to work- you invest in shares of chosen companies, and if the company earns profit, it might share a part of this profit with its shareholders. This is over and above the profit earned by the increase in the market value of shares. When it comes to Mutual Funds, there may be two options for the investors to invest in schemes- growth option and IDCW option. Many times, the IDCW option in mutual funds is confused with the dividends distributed in the share market. However, they are not the same.

What is dividend in mutual funds?

While in the growth option, unless you sell the units of the mutual funds you bought, you will not receive any pay-out. But in the case of the dividend option, a part of the earning and reserves is distributed to its investors, and the remaining part is then reinvested into the scheme. Let us understand with an example-

Let us assume you buy 100 units of a mutual fund scheme with a NAV of Rs 10. Now, going forward, the NAV increases to Rs 15 with time, and let us assume that the fund house declares a dividend of Re 1 per unit. The dividend pay-out will be Re 1x 100 units= Rs 100.

Hence, we conclude that the profit earned by you in the form of a dividend is nothing but what your mutual fund scheme has earned. These are not additional profits made by the companies the fund is invested in. It is your money that you are getting back. Now, whether you want to earn it in parts via the dividend option or at once when you redeem via the growth option - is a call that you need to take.

Keep in Mind-

  1. The dividend disbursement is not regular in mutual funds and depends on the availability of distributable surplus.
  2. The IDCW option is more suitable for investors who are looking for an additional or regular source of income. Else, if you do not need the capital invested, you may want to go with the growth option to harness the benefit of compounded growth.
  3. Switching from dividend to growth options or vice versa is as good as the redemption of units and may attract capital gains tax depending on how long you were invested in the asset class.
  4. IDCW option comes with an option of IDCW reinvestment also, wherein the amount declared as the dividend is reinvested in the same scheme and not disbursed to the investor. This reinvestment happens at the new, reduced NAV and the units purchased are added back to the folio.
  5. The Finance Act, 2020, abolished dividend distribution tax (DDT) and introduced a new section 194K to provide that every mutual fund shall at the time of credit of dividend income to the account of the payee or at the time of payment thereof by any mode, whichever is earlier, deduct income-tax (TDS) thereon at the rate of 10%. Tax is not deductible if dividend income in respect of units of mutual fund is below Rs 5000 in a financial year (only for resident investors). Further, as per CBDT press release dated May 13, 2020, reduced withholding tax rate @ 7.5% shall be applicable for the period from May 14, 2020 to March 31, 2021.

Disclaimer:
Helpful information for investors: All Mutual Fund investors have to go through a one-time KYC (know your Customer) process. Investors should deal only with registered mutual funds, to be verified on SEBI website under 'Intermediaries/ Market Infrastructure Institutions'. For redressal of your complaints, you may please visit www.scores.gov.in . For more info on KYC, change in various details & redressal of complaints, visit mf.nipponindiaim.com/InvestorEducation/what-to-know-when-investing.htm This is an investor education and awareness initiative by Nippon India Mutual Fund.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.