Mutual Funds

FAQs on fund dividends

| Updated on June 23, 2012

It is not compulsory for mutual funds to give dividends.

Mutual funds choose to declare dividends in schemes. We discuss some of the doubts and queries investors have on dividends.

How does one get income from mutual funds?

Mutual funds distribute their income as dividend. An investor has the option of receiving the dividend payment or opting for reinvestment of the dividend.

In the reinvestment option the investor gets dividend in the form of units (that is, the dividend declared gets converted into units and is reinvested into the scheme).

I have invested Rs 20,000 in a scheme at Rs 40 and the fund declared dividend at 50 per cent for the scheme. However, I received only Rs 2,500 as dividend. Why?

Please note that dividend is declared at the face value of the units, that is, on Rs 10. If dividend is declared at 50 per cent it would mean 50 per cent of Rs 10. The dividend would be Rs 5 a unit. Having 500 units, you have received Rs 2,500.

I invested in a tax-saving scheme (ELSS) three years ago and have opted for dividend reinvestment. Dividends have been reinvested every year. However, I am unable to redeem the dividends as the mutual fund says that the reinvested dividend is under lock-in. Why is this so?

Every time dividend is reinvested, it is similar to a new purchase by you.

For example, if you invested in March 2007 and a dividend was declared and reinvested in March 2008, the reinvested amount would be taken as a new purchase in March 2008 and the units, being invested in ELSS, would be locked in for three years. Every subsequent dividend would thus be locked in. However, the dividend reinvested is eligible for deduction from income under Section 80C of the Income-Tax Act.

What do I do now to stop this and to be able to redeem my investment?

You may change the dividend option to payout by giving a simple request letter to the fund, signed by the unit holder(s). Please mention the folio number and the scheme in your letter requesting for the change.

Once the option is changed, your dividend will be paid out to you. As for the reinvested dividend, you can redeem the same three years after the date of reinvestment.

I have received dividends for a few years for my schemes. This year I have not received any dividend. Why is that so?

It is not compulsory for mutual funds to pay out their income as dividends. If dividend is paid out in one year, the fund need not necessarily declare dividend subsequently. Mutual funds can pay dividend only out of realised gains and, therefore, dividend may not be paid out every year. The payout depends on market conditions, which influence fund performance.

I have lost track of the dividends declared and received. How can I check the same?

You may request for a complete account statement since inception, that is, since your first purchase in the scheme. The statement will give details of all transactions since inception including dividends paid out. You may then reconcile by checking for cheques received or with your bank account for credits received. If you have not received the same you may inform the fund concerned to check if any dividend warrant was returned undelivered or any credit that may not have taken place.

(Contributed by CAMS Viveka, an investor education initiative from CAMS. The views expressed are general practices in the mutual fund industry and may vary according to the case.)

Published on June 23, 2012

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