Stocks can be broadly divided into two categories – those that pay regular dividends and those that don’t. As the name suggests, dividend mutual funds invest a major portion of their investible corpus in shares of companies that pay regular dividends to shareholders.
Therefore, these funds receive dividends from the companies they have invested in. These dividends are passed on to individual investors of the mutual fund. Dividend funds are of two types:
1. Dividend yield funds – where the dividend received by the mutual fund is paid out to unitholders. If the fund house fails to pay out the dividend within 30 days of the dividend declaration, then it has to pay interest to the unitholders for the period of delay.
2. Dividend reinvestment funds – where the dividend received by the mutual fund is reinvested in shares, increasing the NAV of the fund.
Hence, dividend yield funds are ideal for investors seeking a regular stream of income from their investments. On the other hand, dividend reinvestment funds offer a better opportunity for capital appreciation.
However, it is important to remember that while the fund manager chooses stocks that have a history of declaring strong dividends, there is no guarantee that the companies will continue declaring dividends in the future. The fund manager will make changes to the portfolio accordingly, but that is a risk that investors must consider.
Therefore, these funds receive dividends from the companies they have invested in. These dividends are passed on to individual investors of the mutual fund. Dividend funds are of two types:
1. Dividend yield funds – where the dividend received by the mutual fund is paid out to unitholders. If the fund house fails to pay out the dividend within 30 days of the dividend declaration, then it has to pay interest to the unitholders for the period of delay.
2. Dividend reinvestment funds – where the dividend received by the mutual fund is reinvested in shares, increasing the NAV of the fund.
Hence, dividend yield funds are ideal for investors seeking a regular stream of income from their investments. On the other hand, dividend reinvestment funds offer a better opportunity for capital appreciation.
However, it is important to remember that while the fund manager chooses stocks that have a history of declaring strong dividends, there is no guarantee that the companies will continue declaring dividends in the future. The fund manager will make changes to the portfolio accordingly, but that is a risk that investors must consider.
