Many investors opt for the dividend options of Mutual funds as it gives them intermittent cash flows, which comes handy in meeting their regular expenses. This article talks about Growth and Dividend options of Mutual Funds, How does a Mutual Fund declare a dividend? What are Record Date, Face Value of Fund, Tax treatment of Dividends, Dividend Distribution Tax, Switching between Mutual Funds.

Mutual fund schemes offer three options while investing: Growth, Dividend Payout, and Dividend Reinvestment.

• Under the Dividend payout option, the scheme distributes realised profits to investors as dividends. This option is useful to investors looking for periodic income from their mutual fund investments.
• Dividend reinvestment option does not distribute the dividends to investors, the dividend is declared, but not physically paid out. Instead, it is reinvested back into the scheme.and the additional units are issued.  These additional units are treated like a fresh purchase.
• The Growth option reinvests the profits back into the scheme and it is the ideal option for investors who are looking to create a corpus for long-term goals.

Same fund manager manages the different options. The investment portfolio that will be handled by the fund manager is same, irrespective of which option one chooses. So the choice of fund will not modify the performance of Mutual Funds.

The choices are accounting entries that the fund makes to suit the needs of investors who may require dividend payouts. The following table shows difference between Growth, Dividend Reinvestment, and Dividend Payout options. Our article Growth and Dividend Option in Mutual Funds

Description	Growth	Dividend Reinvestment Option	Dividend Payout Option
Dividend Received	No	Yes	No
Dividend distribution tax(DDT)	No	Yes for schemes with equity <65%	Yes for schemes with equity <65%
NAV Change	No	Declines to the extent of dividend and DDT	Declines to the extent of dividend and DDT
Number of Units	No change	Increase in no of units	No change

 A dividend is a payment made by a corporation to its shareholders, usually as a distribution of profits. When a corporation earns a profit or surplus, it can either re-invest it in the business, or it can distribute it to shareholders. A corporation may retain a portion of its earnings and pay the remainder as a dividend. 

Typically dividend is associated with stocks. A dividend is a portion of a company’s earnings that is returned to shareholders. Dividends provide an added incentive to own stock in stable companies. For a lot of stock investors, dividend income means a lot. With stocks, regular dividends (in combination with other key factors like revenue and profit growth, cash flows) speak for the company’s solid fundamentals.

But with Mutual Funds dividends are different. A mutual fund does not declare a dividend from its own pocket but is from profit. Dividend in a mutual fund is your own money coming back to you. The exact amount of dividend that is declared will be reduced from the Net Asset Value (NAV), so effectively your net wealth does not change.

Suppose you hold 1,000 mutual fund units with a NAV of Rs 20 and the fund house declares a dividend of Rs 2 per unit. Since the dividend is coming directly from the NAV, the NAV will fall by Rs 2 to Rs 18. You would get 1000 *2 = 2000 Rs

How does a Mutual Fund declare a dividend?

A mutual fund scheme can declare dividends only from the realised profits in its portfolio. Realised profits are the gains made by the fund manager from instruments by selling them and booking profits or when he receives dividend or interest (for debt funds) from the instruments the scheme holds.

Unrealised profits or paper profit from the instruments held cannot be used to pay dividends. These profits are added to the NAV. Some part of this can be declared as dividend depending on the fund manager. Alternatively, the fund manager could also deploy this money back in buying stocks or debt instruments in line with the scheme objectives.

At what frequency can an investor expect a dividend from a mutual fund scheme?

Schemes can announce dividend daily, monthly, quarterly or annually as the case may be. For example, many hybrid funds or monthly income plans endeavor to give a monthly dividend to their unit holders. However, the dividends are not certain and the amount is also not fixed.

Usually, under the dividend option, the NAV (net asset value) is not allowed to grow higher and whenever it reaches a certain level, the fund house pays out dividends. Assume you have invested in a fund at the NAV of  Rs14 and opted for dividend option. The scheme performs and, after the appreciation the NAV reaches Rs 16. The fund house may decide to pay out Rs 2 as the dividend. So you receive Rs 2 as dividend and simultaneously the NAV will fall back to Rs 14.

Face Value of Mutual Fund

In case, of shares Face Value is the initial value of the share with which the initial value of the company’s capital is envisaged. For example, if a company is envisaged to have an initial capital of Rs 10 lakh divided into shares of Rs 10 each, Rs 10 is the Face Value of the share & the value of initial equity is Rs 10 lakh.  Market value is the current price at which the shares of a company change hands. Face Value changes when the company splits the stock to half the stock price by doubling the number of shares. From an  investor’s point of view, it has no bearing on the actual value of the company. Dividends of Stocks are declared on Face Value of share and not market price.

For Mutual Funds, like Shares, Face Value is the initial value at which Mutual Fund lists after New Fund Offer (NFO) and it is usually Rs 10. But NAV of a Mutual fund is the current price at which the units of a mutual fund change hands. From an investor’s point of view, it has no bearing on the actual value of the Mutual Fund. Dividends of Mutual Funds are declared on Face Value of Mutual Fund and not NAV. For ex, if mutual fund declares a dividend of 20% of face value then taking Face Value of Rs 10 Dividend works out to be Rs 2 per unit. The performance of a scheme is reflected in its net asset value (NAV) which is disclosed on daily basis in case of open-ended schemes and on weekly basis in case of close-ended schemes

Terms associated with Dividend Options of Mutual Funds

Record Date: is the date when the mutual fund company records who its unitholders are. The unitholders of record will receive the fund’s income dividend

Ex-Dividend Date: The date on which a fund’s Net Asset Value (NAV) will fall by an amount equal to the dividend. It is usually a few days after the record date. NAV of the Mutual Fund falls on that date.

Dividend Distribution Tax (DDT): dividends are not taxable at the hands of investors but Mutual Fund company has to pay Dividend Distribution Tax.

Dividend amount:  Dividend is declared per unit. So dividend amount that one gets is by multiplying number of units with dividend amount. Dividends of Mutual Funds are declared on Face Value of Mutual Fund and not NAV.

Dividend History is the past track record of dividends declared by a fund. It is easier to declare dividends when markets are doing fine, but you should always check if the fund has performed equally well across market cycles, and if it has declared similar dividend rates during the ‘bear’ phase of the market. This will help you gauge the consistency of a mutual fund scheme fund to an extent.

• Is One entitled to dividend payout if one buys the fund on ex-date itself?
• A: No, the investor will only get the dividend if he/she invests before or on the record date of the dividend.
• Is One entitled to dividend payout if one buys the fund one day before ex-date? 
• A: Yes.
• Is One entitled to dividend payout if one sells the fund on or after ex-date?
• A: Yes.

Suppose Shyam invested Rs 2000 to buy a Mutual Fund at NAV of Rs 20. The Number of units Shyam will get are Investment Amount / NAV of the Fund on the Allotment Date. So Shyam gets  2000/20=100 units.

After a year, NAV of Mutual Fund goes to Rs 25. Now mutual fund declares a dividend of 20% of face value which mostly is Rs 10 hence Rs 2 per unit. NAV of Mutual Fund becomes 25-2 =23 per unit.

• Shyam will get Rs 2*100 = 200 Rs as Dividend if he chose Dividend Payout,
• Shyam will get (2*100)/23 = 66.67 new units if he chose Dividend Reinvestment.
• Shyam will not get anything if he chose Growth Option but NAV will remain Rs 25.

How to find Dividend History of Mutual Funds?

Dividend History is the past track record of dividends declared by a fund. It is easier to declare dividends when markets are doing fine, but you should always check if the fund has performed equally well across market cycles, and if it has declared similar dividend rates during the ‘bear’ phase of the market. This will help you gauge the consistency of a mutual fund scheme fund to an extent.

Fund Houses have Dividend History of the funds. Many websites like EconomicTimes, MoneyControl, Value reserachOnline, Advisor Khoj have information about Dividends declared.  In moneycontrol.com, find the name of the Mutual Fund scheme and on Left Hand Side click on Dividend History, shown in the image below. You will see entire Dividend History of the fund since its inception. For example For HDFC Prudence Dividend History from moneycontrol  shown in the image below.

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Financial planners recommend dividend option for conservative investors in equity for those who are risk averse and those who need some cash flows. For those looking to build wealth over the long term through equity mutual fund systematic investment plan (SIP) it is advisable to opt for the growth option.This is because the compounding benefit is lost when the dividend is paid unless the amount is invested immediately in a higher than equity yielding asset. Do you invest in Dividend Option? Which one Dividend Payout or Reinvestment? Why do you invest in Dividend options.