Understanding mutual fund payouts

 

Almost everybody is aware of what happens with stocks payouts which are invariably reinvested or used to supplement an income. But not many are clear about the payout in mutual funds which are also called distributions. Read on to understand mutual funds payouts in detail.

Not all mutual funds have payouts

The first thing that you must understand is that not all mutual funds pay distribution because several funds are invested in companies that do not pay any dividends, hence there is nothing to distribute. Thus, when you invest in funds you have the option to choose funds that pay dividends and those that don’t distribute any dividend income.

Those mutual funds that do distribute the income do so only after deducting their operating expenses. That is why funds that distribute dividends often invest in companies that have high payouts so that after deducting their costs they still have enough to distribute among the investors.

Reinvest or encash your dividends

Investors who receive these dividends have the choice of deciding whether they want it in the form of a cheque to supplement their income or they want to reinvest. Normally retirees like to use the amount to increase their regular income while the vast majority like to reinvest. Almost all dividend-based funds have their payouts on a quarterly basis.

How can I know how much payout I will get

Your fund manager will inform you about all the related details. You can also find the information on the company website. The distribution is not constant always because it is based on the stocks that the funds are invested in and how they perform. It also depends on the payout policies of the stocks which can undergo changes. The best way to determine how much payouts you might get is to look at the fund’s distribution history.

Does reinvestment affect taxation

You have to pay tax on both the dividend income and reinvestment amount. The only difference is that the taxation rate on the dividend income is much higher than the one levied on reinvestment amount. This tax credit can be beneficial for you. of course, the bottom line is that you pay tax on only what is distributed to your account and nothing else.

Should I opt for dividends?

This brings us to the very basic question of whether dividends are beneficial to everyone. Unless you want to supplement your regular income you might not benefit with dividend funds.