Implications of a mutual fund not paying dividend

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A COMMON problem that a lot of people face is how to handle the dividend received from mutual funds and the impact this would have on their finances. Investors worry whether the dividend should be reinvested or should be taken out and used elsewhere. When there is no dividend declared by a mutual fund, an investor could get worried. What does the entire situation mean for investors and how should they actually handle such a situation?

Regularity in the past: The first thing that should be done in case there is no dividend declared by the mutual fund in the current year is to look at the regularity of the dividend declaration by the fund in the past. It could be that there is a specific time of the year when the fund regularly declares a dividend. The time period has to be seen on a longer term basis to establish that there is a specific period when the dividend is actually declared. There are times when the fund could be declaring multiple dividends during the year in equity-oriented funds and if this is the case, then there would be a one-time payout, which would be the regular time, with the rest of the declarations being additional ones, so the right time has to be focused on.

Change with respect to the past: Once the regular dividend time is known and the history of the past several years is obtained, it is time to see how the present situation actually stacks up. There have been some market crisis in terms of negative returns in the past and due to this reason, there is also some history as to how funds have reacted during such tough times.

If the fund actually follows the practice of holding back on the dividends when the times are tough, then this should not be any cause for worry. The present situation could actually rank in that category for the fund, and, hence, it may have decided to play safe for the moment and not declare dividends. This is something that has to be taken into consideration. In other situations, it could be that the dividend is delayed for some time when the times are tough or it could be a reduced figure, so a possibility of these occurrences should be reviewed.

Fund position: The dividend that is declared by a fund is not something that comes out of mere workings or paper entries.

Everything here is based on the performance of the fund, therefore, this is something that needs primary focus. The investor has to look at the kind of performance that the fund has actually generated and if this is strongly negative, then the expectation also needs to be aligned with the actual position. If there are no earnings, then it not going to be possible for the fund to actually declare dividends because this needs to be paid out of the gains that have been recorded by the fund.

The position for the future also needs to be analysed so that the expectations are also controlled going forward. One cannot just expect dividends to flow in when the portfolio languishes due to poor performance of the equity markets.

Therefore, there has to be an improvement in this area first after which there will be changes that will be witnessed down the line. Planning for this kind of `no dividend' situation will help an investor manage cash better and also reduce constant worries about the investment.

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