What happens to the dividend received by mutual funds?

I have multiple questions. Firstly, I wanted to know where is the dividend accumulated in case of mutual funds? How do we get it? In direct equity stocks, it comes to our bank account. But what happens in mutual funds? Secondly, I have recently shifted my investment from regular to direct plan. What would be my tax liability? Thirdly, where does the money go when a share is listed and we purchase it?
-Uttam

I will first answer your question related to dividends. The dividend paid by the company in the portfolio of a mutual fund scheme gets immediately reflected in the NAV. But it is not necessary that a mutual fund would pay you a dividend (in case of dividend option) when it gets a dividend from some companies in its portfolio. The fund house pays dividend on its discretion and may also distribute it without receiving any, say when it has realised some profit from the shares in its portfolio. However, as soon as the dividend is paid by a mutual fund scheme, the NAV gets reduced by the same amount. It is like getting a part of your money back. Unlike a dividend from equity shares, dividend from mutual funds is completely an arithmetic adjustment.

In regards to the tax liability on moving from a regular to a direct plan, the realised gains will be liable to capital gains tax liability. Every fund house gives a capital gain statement and you can request the same to know the amount of gains. Remember, long-term capital gains on equity up till January 31, 2018 have been grandfathered and the tax liability will arise only on the gains after that.

Now answering your third question, when a company raises money, it does mention in the prospectus the reason for which it would be used, whether for expansion or any other purpose. When you buy a share, you become a part owner of the company. And hence, it is very important to know the purpose for which it will be used before investing in the company.

This article was originally published on June 21, 2021.