This is an investment fund in which investors’ pool in their money mutually. Dividend in a mutual fund scheme refers to a portion of a company’s realised profit i.e. the gain it has made by selling the units at a rate higher than what it had cost them during purchase. It is prevalent in large companies which are financially well established and thus often pass through a portion of their profits in the form of dividend income and is an exciting scheme for more investors. It may occur in the form of stocks, mutual fund returns, and more.
However, in order to pay for dividends one cannot use unrealised profits from the securities and instruments held in the portfolio. Also the payment of dividend is not an assured occurrence. It may not guarantee you that a dividend is paid but most schemes try to stick to their respective mandate and ensure its payment. The frequency for payment of dividend is decided by the schemes of mutual funds itself. It can be paid daily, weekly, monthly, quarterly, semi-annually, annually or as and when there is surplus money. The dividend is received from schemes of mutual funds like equity, debt or hybrid schemes which are tax-free.
Sometimes people often use the cash from their dividends to buy even more number of shares as is seen in case of investors who own individual shares of stock. This is called the dividend reinvestment program. It can either be directly set up through the issuing company or through their broker. This process is an easy one with mutual funds and can be done by simply notifying the broker or the fund company for the reinvestment process. Sometimes the shareholder can use their dividend to purchase shares of a different fund automatically.