Mutual Funda: How do Mutual Funds make money for you?

Mutual Funda: Mutual Funds can generate returns for you in the form of Capital Gains or Dividends. Find out what this means and use this knowledge to plan your mutual fund investments

When you invest in a mutual fund scheme, the money is used to purchase Units of the scheme.  This makes you a Unitholder in the Scheme. NAV(Net Asset Value) represents the price of one unit of that particular Mutual Fund scheme.

You can calculate the value of your investment by multiplying the number of units you hold with the NAV as on that date. NAV of mutual fund schemes is mostly declared by the fund house on a daily basis. You can look up the number of units you hold, the cost of your investment and current value in the holdings section on kuvera.in.

One can make money from Mutual Funds in two ways:

Capital Gains

This is the difference in the purchase cost and the current value of your mutual fund holdings. When  you sell/redeem the units you hold, then the difference in sale proceeds and purchase cost is the Capital Gain. You can think of this as your return or profit from the mutual fund investment.

When you select the Growth option while investing in Mutual Fund Schemes, your primary objective will be to generate income in the form of capital gains only.

Dividends

Mutual Funds generate profits from buying and selling of stocks and bonds(capital gains) or the dividend and/or interest they receive from the stock or bond investments that the scheme has made.

Mutual funds may announce dividends periodically. This is specifically for investors looking to generate a stream of income from Mutual Fund Investments, the . Thus, dividends are a share of the profits that the mutual fund will pay out.  And, most schemes have a Dividend Payout or a Dividend Re-investment option.

1. Dividend Payout Option:  You can select the dividend payout option when you invest.  Then, you will receive Dividend Payments directly into your bank account.
2. Dividend Re-investment Option: In this case, you will receive Dividend Payments in the form of additional units of the Mutual Fund scheme. These units are allotted to you on the basis of the NAV of the scheme on the date the Dividend is to be paid. So in this option, the number of units you hold in the mutual fund scheme will increase post a dividend announcement.

Outside of tax considerations, we recommend investors to invest in the Growth option of Mutual Fund Schemes. While you won’t receive Dividends, your money remains with the Fund and keeps getting compounded. In effect, you let more of your money work for you. And when you need money, sell some units and generate the required cash.

We hope this increases your understanding of how one makes money from Mutual Fund investing. If you have more questions, do write to us on support@kuvera.in.

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