A dividend yield fund, a type of mutual fund, primarily invests in companies with the potential to offer consistent dividends to shareholders. These funds aim to provide income to investors by focusing on high-dividend-yielding stocks. According to SEBI regulations, at least 65% of a dividend yield fund's assets must be invested in equity and related instruments.
In the case of a company, the profits made by the entity can either be reinvested back into the company, or they can be distributed to the company’s shareholders. If a part of the company’s profits is paid out to shareholders, that portion is what we call dividends.
But how do mutual funds pay dividends? Well, the mutual fund scheme itself may make profits, and if it chooses to, it can distribute these profits to the investors in the form of dividends.
That said, not all mutual fund schemes pay out dividends to their investors. Some funds choose to reinvest the profits they make back into the scheme. Based on whether the mutual fund scheme’s profits are paid out or reinvested, we have two types of MFs, namely those with the growth option and those with the dividend option.
When you choose the growth option in a mutual fund, the profits that the fund makes are reinvested back into the scheme instead of being paid out to you. This effectively results in compounding, since you continue to earn returns on your returns.
For instance, let’s say you hold 10,000 units in a mutual fund scheme, and the scheme declares a profit of ₹2 per unit. In this case, your total share of the profits will be ₹20,000. This money will not be paid out to you in the growth option.
Instead, it will be reinvested into the scheme, and your holdings will increase accordingly, based on the NAV of the units. So, if the NAV is ₹5, your holdings will increase by 4,000 units. (₹20,000 ÷ ₹5). This effectively means your portfolio will grow from 10,000 units to 14,000 units.
In April 2021, the dividend option was renamed by the SEBI as Income Distribution cum Capital Withdrawal (IDCW). So, in case you choose the IDCW option, the dividends declared by the mutual fund house are paid out to you. Dividends on mutual funds are most commonly paid out annually.
However, there are also quarterly or monthly dividend mutual funds that pay out dividends more frequently. The dividend that is paid out is deducted from the current NAV of the fund. For example, if a mutual fund scheme has a NAV of ₹10 per unit, and declares a dividend at the rate of ₹3 per unit, the NAV will fall to ₹7 per unit.
If you want to set up a source of alternate income, or if you are looking for some additional cash flow, you need to invest in mutual funds with the dividend option or the IDCW option. This option can be found in different kinds of mutual funds such as equity funds, money market funds, low duration funds, liquid funds and even hybrid funds.
Here is a closer look at some of the recent mutual funds dividends in the Indian markets.
And here is a table showing you some of the upcoming dividends in mutual fund schemes in India, as on October, 2023.
The dividend payout option aka the IDCW option is a choice you make when you invest in any mutual fund. It simply ensures that the mutual fund scheme pays out its profits to you as dividends, as and when they are declared. The dividend payout option is available for different kinds of mutual funds, irrespective of the kind of assets they invest in or their investment tenure.
Dividend yield mutual funds, on the other hand, are a specific type of equity mutual funds. They invest primarily in stocks that are known to declare high dividends, which are well above the market average. SEBI guidelines suggest that dividend yield funds should invest at least 65% of their assets in stocks that pay out dividends.
That said, like all mutual funds, dividend yield funds may also come with growth and IDCW options. And here too, you will receive regular payouts only if you choose the IDCW option.
The bottom line is that no matter what kind of mutual fund you invest in, you will only receive dividend payouts if you choose the Income Distribution cum Capital Withdrawal (IDCW) option. So, before you choose mutual funds for your investment portfolio, check whether the funds you have shortlisted offer this option.
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Dividends in mutual funds can be either paid to investors or reinvested in the fund. When dividends are reinvested, your total holdings increase. For example, if you own 1,000 units in a mutual fund and it declares a ₹5 per unit dividend, with reinvestment at a ₹10 NAV, your holdings grow by 500 units (₹5,000 ÷ ₹10). So, you would have 1,500 units after reinvestment.
Mutual funds can pay dividends to investors, and you can select between the growth or dividend options when investing. In the dividend option, you receive profits at regular intervals. On the other hand, dividend yield mutual funds invest in high-dividend-paying stocks; however, dividends might not always be distributed to you. If you choose the growth option, the gains are reinvested in the fund.
Yes, dividend mutual funds can be an excellent investment option for you if you are looking for a source of regular additional income. The dividend payouts from your mutual fund investment may be made on a monthly, quarterly or annual basis.
ICICI Prudential Dividend Yield Equity Fund, Templeton India Equity Income Fund, Aditya Birla Sun Life Dividend Yield Fund, IDBI Dividend Yield Fund, Sundaram Dividend Yield Fund are some of the mutual funds which gives dividend.
Some ways through which mutual fund dividends are paid are
