If reading this, there is a good chance you have heard about dividend options in mutual funds at some point in your life. Maybe you plan to leverage this approach but know nothing. If so, there is no reason to panic since you’re not alone. A good number of individuals have no idea what dividend option means in a mutual fund.
And they are not to blame since there is more to dividend options in mutual funds than it seems in the first place. For this reason, doing a bit of research will help you clear some of the doubts in your mind. Well, that is what this simple guide is going to ensure you do today.
Before going any further, you should remember that a mutual fund scheme be it debt or equity can declare dividend for its unitholders from the profits realized in its portfolio. By realized profits we are merely implying to the gains made from instruments by selling them at a higher price. Of course, this is in relation to the purchase price or securities held in the scheme that receive dividend.
You might already be wondering how dividends are taxed in the hands of the investor. To help clear some of your doubts, dividends received from all mutual fund schemes are tax-free in the hands of the investors. Things tend to be different when it comes to debt funds since the fund house pays a dividend distribution tax. In an equity mutual fund, you won’t contend with any dividend distribution tax.
If you happen to be in the highest tax bracket, it is ideal that you invest for a period less than three years. To reap maximum benefits, be sure to opt for the daily dividend option in ultra-short-term funds. Ensure you factor in the pros and cons of each approach before taking the next step.