“Recently, a company whose shares are held by an Equity Mutual Fund I am invested in declared dividends. What will happen to these dividends? Will I receive a dividend payout?” – Arjun
Equity Mutual Fundsprimarily invest in stocks of various companies. So from time to time, the Mutual Fund can receive dividends from one or more of the companies it has invested in.
The dividends received by a Mutual Fund do benefit investors even though the money is not directly transferred to the investor’s bank account. Here’s how
As the money is received, it is held as cash or in highly liquid low-risk debt instruments (sometimes called cash equivalents). Because of this extra cash, the AUM goes up, and you will also see an impact on NAV (it goes up) due to these dividends coming in.
But this is temporary parking of the dividends. Then, as the fund manager finds the right opportunity, he takes these dividend payouts to invest so that this money grows too.
This process of how dividends get used is followed even if you have a Dividend Plan of a fund. This can be quite confusing for most investors of the jargon. However, the dividend plans payout is not a dividend received from a company but a part of returns generated by the fund. Dividends from a company can be part of those generated returns, but they are not the only component of what is paid out.
To reflect the true nature of what Dividend Plans payout, SEBI mandated the name of these plans be changed toIncome Distribution cum Capital Withdrawal (IDCW) Plans. This change came into effect from 1st April 2021.
Written By Sridhar Sahu
Sridhar Kumar Sahu is a Content Writer for ET Money. He has over six years of experience in covering personal finance topics and markets. He holds a Master’s degree in English Journalism from IIMC, New Delhi and B.Tech in Mechanical Engineering from BPUT, Odisha.
