Depending on the type of investments included in the portfolio, mutual funds may pay dividends, interest, or both.
Types of Mutual Funds
There are four main categories of mutual funds, and each category suits different investing goals. Stock funds include only investments in the stock market. If any of these stocks pay dividends, then the mutual fund also pays dividends.
Similarly, bond funds include only investments in corporate and government bonds. Most bonds pay guaranteed amounts of interest each year, called coupon payments. Because bonds pay interest, bond funds do as well.
Balanced funds invest in stocks and bonds. Balanced funds, therefore, are almost guaranteed to pay interest, and they may also pay dividends depending on the specific stocks included in the portfolio.
Money market funds are considered the most stable type of mutual fund and include only investments in very short-term debt instruments such as municipal bonds. Money market funds also pay interest, though the rate of return is generally lower than other fund types.
Why Do Mutual Funds Pay Dividends and Interest?
To avoid paying taxes on investment income, mutual funds are required to distribute almost all proceeds to shareholders. This means that when a stock or bond within the fund's portfolio pays dividends or interest, that money must then be distributed to the fund's shareholders so the fund is not required to include it as income. Individual shareholders then report that investment income on their taxes for the year. The same is true if the fund makes a profit from the sale of an asset, called a capital gain.
The timing of mutual fund distributions, including dividend and interest payments, is at the discretion of each individual fund and can vary widely. Generally, funds that generate dividends or interest must make distributions to shareholders at least once a year.
Advisor Insight
Dan Stewart, CFA®
Revere Asset Management, Dallas, TX
Mutual fund distributions are classified according to the type and character of the distribution. Thus, mutual funds can pay interest, dividends, and/or capital gains via distributions, which will determine the amount of tax you have to pay.
A bond fund, for instance, will typically pay interest, but also capital gains when the bonds are sold. A balanced fund holds both stocks and bonds, and therefore you can have all three types of distributions.
The reason for this is because a mutual fund simply passes through the distributions it receives from the securities, so as not to incur double taxation (at the fund level and then to the shareholder). If your investments are held in an IRA or another retirement account however, the tax consequences are irrelevant since they are tax-deferred.
FAQs
Mutual fund distributions are classified according to the type and character of the distribution. Thus, mutual funds can pay interest, dividends, and/or capital gains via distributions, which will determine the amount of tax you have to pay.
Do mutual funds pay dividends and interest? ›
Mutual funds are required to pass on all net income to shareholders in the form of dividend payments, including interest earned by debt securities like corporate and government bonds, Treasury bills, and Treasury notes.
Does a fund pay dividend or interest? ›
Funds will either make dividend distributions or interest distributions. If the fund predominantly holds shares, they will make a dividend payment. If the fund predominantly holds bonds, they will make an interest payment.
Do mutual funds have interest income? ›
Some mutual funds pay interest, though it depends on the types of assets held in the funds' portfolios.
How to find out when a mutual fund pays dividends? ›
You can find information about your fund's dividend and distribution schedule in the fund's prospectus.
Can you live off mutual fund dividends? ›
You can retire on dividends. To do so, you generally need to start investing in dividend-paying assets early and reinvest the dividends until you retire.
How much dividend will I get from mutual funds? ›
List of Dividend Yield Mutual Funds in India
| Fund Name | Category | 1Y Returns |
|---|
| HDFC Dividend Yield Fund | Equity | 50.9% |
| LIC MFDividend Yield Fund | Equity | 62.0% |
| Aditya Birla Sun Life Dividend Yield Fund | Equity | 53.9% |
| Templeton India Equity Income Fund | Equity | 48.6% |
7 more rowsList of Returns from Moderate Risk Equity Funds
| Scheme Name | 1 Year | 3 Years |
|---|
| Sundaram Equity Savings Fund | 21.43% | 14.27% |
| Axis Equity Saver Fund | 20.31% | 12.24% |
| HDFC Equity Savings Fund | 20.06% | 13.43% |
| Edelweiss Equity Savings Fund | 17.51% | 12.02% |
2 more rows21 Best Dividend ETFs and Mutual Funds
- Vanguard Dividend Appreciation Index VDADX.
- Vanguard Dividend Growth VDIGX.
- Vanguard High Dividend Yield ETF VYM.
- Vanguard High Dividend Yield Index VHYAX.
- WisdomTree U.S. LargeCap Dividend ETF DLN.
- WisdomTree U.S. MidCap Dividend ETF DON.
- WisdomTree U.S. SmallCap Dividend ETF DES.
Best Dividend Mutual Funds in India Based on Absolute Returns – 1Y
| Fund Name | AUM (in cr) | Minimum Lumpsum |
|---|
| ICICI Pru Dividend Yield Equity Fund | ₹3,930.83 | ₹5,000 |
| Aditya Birla SL Dividend Yield Fund | ₹1,353.33 | ₹1,000 |
| UTI Dividend Yield Fund | ₹3,702.67 | ₹5000 |
| Templeton India Equity Income Fund | ₹2,210.67 | ₹5000 |
5 more rowsHold Funds in a Retirement Account
This means you can sell shares of your mutual fund or collect a capital gains distribution without paying the relevant taxes so long as you keep the money in that retirement account.
Do you pay taxes on mutual fund dividends? ›
If you hold shares in a taxable account, you are required to pay taxes on mutual fund distributions, whether the distributions are paid out in cash or reinvested in additional shares. The funds report distributions to shareholders on IRS Form 1099-DIV after the end of each calendar year.
How do you make money from mutual funds? ›
If you own a mutual fund, you're considered a shareholder. You can make a profit from your investments in one of two ways: through dividends or capital gains. Dividends are a reward to shareholders for holding onto certain stocks or mutual funds for the long term.
Why don't mutual funds pay dividends? ›
A large-cap stock fund that holds mostly mature dividend-paying stocks often produces a lower but steady payment. A small-cap growth fund may pay no dividend at all, since the companies it holds often reinvest their profits back into the business instead of paying them out as dividends.
Is it better to sell mutual funds before or after dividends? ›
The longer the investor has to delay their purchase, the greater this risk becomes. Some investors also may consider selling fund shares before a distribution to avoid the tax due. If the investor had gains on the shares at the time of the sale, the realized gains would be taxable in the year the shares were sold.
Does Vanguard pay dividends? ›
Vanguard is a large investment advisor offering mutual funds and ETFs, many of which pay dividends. Most of Vanguard's ETF products pay monthly or quarterly dividends. Expense ratios are the fees investors pay for investing in a fund; the lower the better.
Does mutual fund give interest? ›
Thus, mutual funds can pay interest, dividends, and/or capital gains via distributions, which will determine the amount of tax you have to pay. A bond fund, for instance, will typically pay interest, but also capital gains when the bonds are sold.
Do I pay taxes on mutual fund dividends? ›
If you hold shares in a taxable account, you are required to pay taxes on mutual fund distributions, whether the distributions are paid out in cash or reinvested in additional shares. The funds report distributions to shareholders on IRS Form 1099-DIV after the end of each calendar year.
What mutual fund pays the best dividend? ›
Top dividend mutual funds
- Vanguard Dividend Appreciation Index Admiral Shares (VDADX)
- T. Rowe Price Dividend Growth Fund (PRDGX)
- Vanguard Dividend Growth Investor Shares (VDIGX)
- Vanguard High Dividend Yield Index Admiral Shares (VHYAX)
- Vanguard Equity-Income Investor Shares (VEIPX)
Money market funds are a type of mutual fund that invests in high quality short-term debt. They pay dividends that generally reflect short-term interest rates. Money market funds try to maintain a stable value called a “net asset value” or NAV, typically $1.00 per share.
