A mutual fund scheme can declare dividends only from the realised profits in its portfolio.

Realised profits are the gains made by the fund manager from instruments by selling them and booking profits or when he receives dividend or interest (in case of debt funds) from the instruments the scheme holds.

Unrealised profits or paper profit from the in struments held cannot be used to pay dividends. These profits are added to the NAV . Some part of this can be de clared as dividend de pending on the fund manager. Alternatively , the fund manager could also deploy this money back in buying stocks or debt instruments in line with the scheme objectives.

2. At what frequency can an investor expect a dividend from a mutual fund scheme?

Schemes can announce divi dend daily , monthly , quarterly or annually as the case may be. For example, many hybrid funds or monthly income plans endeavour to give a monthly dividend to their unit holders. However, the dividends are not certain and the amount is also not fixed. Under dividend option, the NAV (net asset value) is not allowed to grow higher and whenever it reaches a certain level, the fund house pays out dividends.Assume you have invested in a fund at the NAV of `14 and opted for dividend option. The scheme performs and after appreciation the NAV reaches `16. The fund house may decide to pay out `2 as dividend. So you receive `2 and simultaneously the NAV will fall back to Rs 14.

3. What is the tax treatment of dividends in mutual funds?

Dividends received from all mutual funds are tax free in the hands of the investors. However, in the case of debt funds the fund house pays a dividend distribution tax of 28.84% which includes surcharge and cess. In an equity mutual fund there is no dividend distribution tax.

4. Does dividend option work for all investors?

Financial planners recom mend dividend option for con servative investors in equity for those who are risk averse and those who need some cash flows. For those looking to build wealth over the long term through equity mutual fund systematic investment plan (SIP) it is advisable to opt for the growth option.This is because the compounding benefit is lost when dividend is paid, unless the amount is invested immediately in a higher than equity yielding asset.