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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.
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Disclaimer:
This is an investor education and awareness initiative by Nippon India Mutual Fund.
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 This is an investor education and awareness initiative by Nippon India Mutual Fund.

The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their associates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document. Language Disclaimer:
While utmost care has been taken in translating the article into respective regional language(s), in case of any confusion or difference of opinion, article available in English language should be deemed as final. The article provided herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional advice for the readers. The document has been prepared on the basis of publicly available data/ information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their associates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of loss of profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this article. "ABOVE ILLUSTRATIONS ARE ONLY FOR UNDERSTANDING, IT IS NOT DIRECTLY OR INDIRECTLY RELATED TO THE PERFORMANCE OF ANY SCHEME OF NIMF. THE VIEWS EXPRESSED HEREIN CONSTITUTE ONLY THE OPINIONS AND DO NOT CONSTITUTE ANY GUIDELINES OR RECOMMENDATION ON ANY COURSE OF ACTION TO BE FOLLOWED BY THE READER. THIS INFORMATION IS MEANT FOR GENERAL READING PURPOSES ONLY AND IS NOT MEANT TO SERVE AS A PROFESSIONAL GUIDE FOR THE READERS."

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