AMFI Exam Tips Series-8

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This chapter explains the process mutual funds use to distribute earnings to shareholders.

Dividend Concepts
Periodic Dividend Funds
Daily Dividend Funds
Money Market Funds
Capital Gains
Impact on NAV

Mutual fund dividends are distributions to shareholders of income earned by a fund’s portfolio, net of the operating expenses of the fund. This income is derived from two sources:

· dividends paid to the portfolio by stocks held in the portfolio, andinterest paid to the portfolio by bonds held in the portfolio

A dividend rate is the total dollar amount to be distributed, divided by the number of outstanding (dividend eligible) shares. It is expressed as cents-per-share.
Mutual funds usually distribute dividends on a set schedule, as outlined in the fund prospectus. Following are some typical distribution patterns:

· daily
· monthly
· quarterly
· semi-annualannual.

Most distributions of income by mutual funds, except for certain distributions by tax free bond or money market funds, are taxable to the shareholder, whether the dividend is taken in cash or reinvested to purchase additional shares.

Dividends are normally considered “ordinary income”, and taxed at the shareholder’s regular income tax rate.

Mutual funds are classified into three categories for purposes of dividend distributions:

· Equity funds (also called periodic funds, or equities)
· Daily dividend funds (also known as daily accrual funds, income funds, bond funds, or dailies)Money Market funds.

Record date is a date, chosen by the fund’s board of directors, which determines whether or not a shareholder is entitled to a dividend distribution. To be entitled to an equity dividend distribution, an investor must be a shareholder of record on record date.
Mutual funds are not required by law to distribute capital gains earned on the sale of portfolio holdings. However, most funds do distribute the majority of this income to avoid paying taxes on those gains at the corporate tax rate.
All capital gain distributions, including capital gains paid by daily dividend funds, follow the same rules for eligibility and distribution as equity fund dividends.
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