Definition of Dividend Plan

The earnings from a mutual fund are available in different ways. One of them is a dividend plan. In a dividend plan, the investor receives a fixed dividend (or payout from his holdings) from time to time. The dividend is not reinvested back into his holdings, unlike in a growth fund.

Points to remember:

• The investor receives dividends in his account, which are not taxed at the receiving end.
• But a Dividend Distribution Tax is levied on the mutual fund schemes before the dividends are paid out to the investors.
• A dividend plan allows investors to engage in ‘dividend stripping’ - which involves exiting the fund at a loss (on paper) after the dividend has been received, since a dividend is deducted from the Net Asset Value (NAV) of a fund.