Index Fund Dividends

I invested in a Nifty index fund. From time-to-time, I read that many of the companies here declare dividends. But I have not got any dividends till date. Where do these dividends go?
-Ruby Mathur

You are correct in that most of the stocks in the Nifty or the Sensex do declare dividends. However, the dividend declared by the index as a whole is not much.

The dividend declared by stocks that the fund holds go back into the fund. This is reflected in the NAV. But because the quantum of dividends is very low, the dividend declaration does not result in a significant appreciation. For instance a Nifty index comprises of 50 companies. At any given point of time only a handful would declare dividends. And hence the total effect on the fund's NAV will not be very significant.

As to when will you get the dividend, it is dependent on the fund you have invested in and the option you have chosen. Many index funds do not have a dividend option. This means that any gains you wish to take will have to be obtained by redeeming the units. And the dividend declared by the inherent companies will appear as an increase in NAV. If you are invested in the dividend option of an index fund, you can wait for the scheme to declare dividends.

This article was originally published on January 17, 2008.