There are scenarios where mutual funds pay dividends or interest depending on the portfolio.
Different Mutual Fund Types
Mutual funds can be broken down into 4 general categories, and each of these categories correlates to a different goal for your investments. These categories are:
- Stock funds – These accounts for investments made in the stock market. If any stocks pay dividends, then the mutual fund will also pay dividends
- Bond funds – These account for investments made in government and corporate bonds. In general, bonds pay a set amount of interest each year. Since these bonds pay interest, the mutual funds do as well.
- Balanced funds – These are investments made in both bonds and stocks. Because the bonds pay interest, balanced funds almost always pay interest. Whether the mutual fund pays dividends on the performance of the stocks.
- Money market funds – These are often cited as the safest category of mutual fund. These are very short duration investments made in debt instruments. Interest is always paid with money market funds, though generally a lower rate than other mutual funds.
Why are dividends and interest paid?
It’s necessary or mutual funds give pretty much all proceeds to the shareholders. So, if a portfolio contains a stock or bond that pays interest or dividends, the money is transferred to the shareholders’ so the fund is not required to include it as income. The shareholders then detail that bond or stock on that year’s taxes.
Source: https://www.investopedia.com/ask/answers/102715/do-mutual-funds-pay-dividends-or-interest.asp
