Mutual funds are the financial instruments that specifically aim at those investors who cannot get time to track the markets and invest in them accordingly. Also, they are a lucrative tool for those who intend to make money through investing in markets but are not educated adequately.
There are different types of Mutual Funds, popularly equity, debt, hybrid, etc. Mutual funds are also used as tax saving instruments and some result in tax savings via dividend declared on schemes invested.
Dividends declared are nothing but a part of profits booked on the Mutual Fund holdings. Dividend declaration is a source of regular income for some investors. Dividend declaration reduces the Net Asset Value (NAV) of the Mutual Fund. There is a misconception amongst the investors that dividend declared on the mutual funds are additional income which is not true. Since the dividends declared are from the NAV only, that’s why it reduces the NAV.
The reason why dividend are declared, although they are not beneficial is that it helps in keeping investors’ confidence. Regular dividends by a company also show its prospects are good.
The investors who redeem units after dividend declaration at lower NAVs will book capital loss and thus resulting in savings on tax. Although to stop the rampant dividend stripping, government has made strict laws in regards to the same.