Mutual Fund Dividend Explained with Example
In this article, we will discuss what is dividend for Mutual Fund. The mutual fund houses profit includes both dividends received from companies and profit which they earn from improving markets. Mutual Fund hounses distribute this profit to their unit holders.
Meaning of Dividend for Mutual FUnds
- Meaning of dividend is different in stocks and Mutual Funds.
- In stocks, dividend is a portion of company’s earnings which is paid to shareholders whereas in Mutual Funds, dividend is the gains of the fund scheme which is distributed to the investor.
- Mutual Fund dividend doesn’t just mean the stock dividend they have got from their investment, it can also be given from capital gain which they have earned on their investments.
- Frequency of paying dividend depends upon fund, it may be anytime during the year. They are no set frequency; Equity funds may not give any dividend in a year or give multiple times.
Types of Options in Mutual FUnds
Mostly large cap companies are more mature, so they tend to distribute their profit as dividend. But in case of small cap companies, they need to invest most of their profit in their growth that’s why their dividend is uncertain.
There are two type of option is available in mutual fund scheme for investor; –
A. Growth option – In this option investor will not received any dividend from fund. Dividend amount that received by fund from companies in which they invested, is reinvest in his portfolio. This reinvestment money directly increases the NAV (Net Asset Value) of fund.in growth option we don’t get regular income but whenever we sale our investment it realize higher return than compare to dividend option.
B. Dividend Option – In this option investor receives dividend from mutual fund. There are two type of option available.
i. Dividend Option – Under this option, the Mutual Fund Company declares Dividend and directly credits that dividend to the bank account of the Unit holder.
ii. Dividend Reinvestment option – Under this option, Dividend declared by the Mutual Fund Company is not credited to Bank Account, but it is reinvested in the respective Mutual Fund Scheme itself. Simply speaking, Fund houses purchase Additional Units from the amount of dividend received.
Example : Dividend Option of Mutual FUnd
For the analysis we are taking dividend option. We calculate dividends distributed by the fund as a % of NAV. And For calculation of dividend as a % of NAV we use the NAV as on the record date. Dividend distributed of fund is compare with its category average from inception of fund.
In this example, we have compared dividends distributed by Aditya Birla Sun Life Frontline Equity Fund with dividends distributed by Large Cap Category Average from its inception year. For detailed analysis of fund, Refer : https://app.mfyadnya.in