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 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. A bond typically pays a fixed interest rate each year, called the coupon payment.
Do money market mutual funds pay interest or dividends? ›
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.
Do all mutual companies pay dividends? ›
Generally, these dividend-paying Whole Life insurance policies are “participating” policies issued by mutual companies. Since a mutual insurance company is owned by its Whole Life insurance policyholders, it is customary for these mutual insurers to pay dividends annually back to its Whole Life policyowners.
Do bond mutual funds pay interest or dividends? ›
Like money market funds, the interest earned on a bond mutual fund's portfolio is passed through to the investor as dividends. These dividends can be taken in cash or reinvested in the fund. This component of a bond mutual fund's earnings, less fund expenses, is called its yield.
How much dividend will I get from mutual funds? ›
How to calculate dividends in mutual funds? Dividends in mutual funds are calculated based on the number of units held and the dividend per unit declared by the fund. For example, if you hold 1,000 units and the fund declares a dividend of ₹5 per unit, you receive ₹5,000.
Does Vanguard S&P 500 pay dividends? ›
The dividend yield of Vanguard S&P 500 UCITS ETF is currently 1.04%. When does Vanguard S&P 500 UCITS ETF pay dividends? Vanguard S&P 500 UCITS ETF pays quarterly dividends.
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.
How much interest do mutual funds pay? ›
List of Returns from Moderate Risk Equity Funds
| Scheme Name | 1 Year | 5 Years |
|---|
| Sundaram Equity Savings Fund | 21.43% | 13.41% |
| Axis Equity Saver Fund | 20.31% | 12.10% |
| HDFC Equity Savings Fund | 20.06% | 13.49% |
| Edelweiss Equity Savings Fund | 17.51% | 11.93% |
2 more rowsMutual funds are pass-through investments, meaning any dividend income they receive must be distributed to shareholders. Dividends paid by a stock or mutual fund (mostly) are considered ordinary income and are subject to your regular income tax rate.
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.
Selling a fund prior to the distribution will generally result in more capital gain or less loss than if you sell the shares after the distribution, if you only take into account market price changes reflecting the distribution. Selling shares after the distribution usually will yield less gain or more loss.
Which mutual fund is best for dividends? ›
Overview of the Best Dividend Yield Mutual Funds
- ICICI Pru Dividend Yield Equity Fund. ...
- Aditya Birla SL Dividend Yield Fund. ...
- UTI Dividend Yield Fund. ...
- Templeton India Equity Income Fund. ...
- HDFC Dividend Yield Fund. ...
- Tata Dividend Yield Fund. ...
- Sundaram Dividend Yield Fund. ...
- SBI Dividend Yield Fund.
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.
Does mutual fund pay interest? ›
Some mutual funds pay interest, though it depends on the types of assets held in the funds' portfolios. More specifically, bond funds, money market funds, and balanced funds pay interest because of the coupon-bearing debt securities in which those types of funds invest.
Is it better to invest in mutual funds or bonds? ›
While the safest returns are drawn from bonds, stocks offer the highest returns, and mutual funds provide investors with more moderate returns.
Do you get interest on mutual funds? ›
Mutual funds distribute income to shareholders through capital gains distributions or dividend distributions. Interest earned by a fund's assets is paid as a dividend distribution. To avoid paying taxes on earnings, mutual funds are required to pass on all net income to shareholders at least once each year.
Do I pay taxes on mutual fund dividends? ›
Dividends paid by a stock or mutual fund (mostly) are considered ordinary income and are subject to your regular income tax rate.
Is a fund a 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.
