JAKARTADAILY.ID – Mutual funds are a professionally managed investment program that is funded by shareholders and trades in varied holdings. It may pay dividends, interest, or both based on the investments in the portfolio. The question is, how do mutual funds income distribution benefit investors?
Mutual funds are divided into four types, each of which caters to distinct investment objectives. Bond funds invest in corporate and government bonds, while stock funds solely invest in the stock market. Bond funds, like stock funds, pay interest, so they're a good option for income-seeking investors.
Balanced funds are mutual funds that invest in stocks and bonds while also paying interest. Money market funds pay interest as well, though at a lesser rate than other forms of investment. Balanced funds are nearly certain to pay interest, and depending on the companies in the portfolio, they may also pay dividends.
Dividend and interest-paying funds must make distributions to investors at least once a year. Individual investors must then record their investment income on their annual tax returns. If the fund makes a profit on the sale of an asset, this is known as a capital gain.
A mutual fund's income distribution to its owners can take two forms, investors can choose to be paid directly, putting money in their hands or they might choose to buy more shares of the fund, thereby reinvesting the dividend amount in new shares.
Mutual fund investors will receive $100 in cash or $100 in additional shares, depending on which option they choose.
You will choose one of the dividend payout options if you live off investment income. If you are saving for retirement, you will want to reinvest that income in more shares of the fund so you can reap the long-term benefits of multiplying your investment.
Mutual funds are required by law to distribute income and realized capital gains to their investors. Because these distributions are made from a fund's assets, its net asset value, and thus its price, decreases as a result.