What is a Dividend Mutual Fund? It is a scheme, where when you invest your money, the Fund pays you dividends on the the profits it makes. A highly attractive proposition, and one which is very popular with investors. People love to receive dividends on the money they invest, and newcomers always ask to be enrolled in schemes which pay out dividends. What in actual fact the 'dividend' is, though, is that it is part of the money you have already invested, being returned to you â?? in the form of a dividend. What the Fund is doing, is investing all the money it takes from the people who invest, and whatever profits it makes, such profits are distributed as dividends to the investors. There are three options to select from, in a Dividend Mutual Funds scheme.
You can select the option to just let your money 'grow' in the scheme.
You can request dividend payouts.
Or you can ask for your dividends to be added on to the money you already have in the scheme.
Some people who feel the need to get a regular income from their investments, opt for the Dividend Mutual Funds scheme. But it does not work that way. Because firstly, the dividends are not declared at regular intervals, they are declared 'as and when'. Secondly, the amount of the dividend declared, is not a fixed amount, it fluctuates. So, if neither the timing nor the amount are fixed, hoping to use the dividends as a regular income, will not work out. But Fund companies are smart, they use the 'dividend' card to entice more people to join the Fund, giving the impression that dividends are profits they will distribute on a regular basis. So a good few people invest their money, hoping to benefit from this. Since from the time the investor joins the scheme and deposits his money, to the time a dividend is actually declared, and reaches the person's bank account, there is a time gap, it still works out to the investor receiving some of the profits made on his own investment. Dividend income declared on mutual funds, does not attract any tax. Also, if your money is lying in the fund for more than a year, it does not attract tax, as in capital gains.
In view of the above, if you need to invest your money for not more than a one year period, it would be better to go for the dividend option, as when you want to dispose off your units, tax will not apply. This option, however, will lessen your gains. To really benefit from the scheme, a longer than one year investment in Dividend Mutual Funds is recommended, with the option of reinvesting your dividends, which will boost your capital.
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