Depending on the type of investments included in the portfolio, mutual funds may pay dividends, interest, or both.

Types of Mutual Funds

There are four main categories of mutual funds, and each categoꦡry suits different investing goals. Stock funds include only investments in the stock market. If any of thes🅠e stocks pay dividends, then the mutual fund also pays dividends.

Similarly, bond funds include only investments in corporate and government bonds𝕴. Most bonds pay guaranteed amounts of interest each year, called coupon payments. Because bonds pay interest, bond funds do as well.

Balanced funds invest in stocks and bonds. Balanced funds, therefore, are almost guaranteed to pay interest, and they may also pay 澳洲幸运5官方开奖结果体彩网:dividends depending on the specific stocks included in the 🅺portfolio.

Money market funds ﷺare considered the most stable type of mutual fund ෴and include only investments in very short-term debt instruments such as municipal bonds. Money market funds also pay interest, though the rate of return is generally lower than other fund types.

Interest vs. Dividends

Interest and dividends are both types of income that investors can earn, but they come from different sources and function in distinct ways. Interest is the payment a lender receives for allowing someone else to use their money. Dividends are payments made by a corporation to its shareholders, usually derived from the company's profits.

Another distinction between interest and dividends lies in the risk and certainty of payments. Interest payments are contractually obligated and must be made regardless of the borrower's financial situation, as long as the terms of the loan or bond are upheld. Dividends, however, are discretionary and can be cut or suspended if a company faces financial difficulties. This means that investors relying on dividend income take on more risk compared to those earning interest, as dividends are dependent on a company's performance and decision-making.

Another distinction is how each is taxed which we'll discuss more in the next section. Interest and dividends are taxed differently. Interest income is generally taxed as 澳洲幸运5官方开奖结果体彩网:ordinary income, which means it can be subject to higher tax rates depending on an individual's overall earnings. Qualified dividends in many c🅰ount♎ries are taxed at a lower capital gains rate.

Why Do Mutual Funds Pay Dividends and Interest?

To avoid paying taxes on investment income, mutual funds are required to distribute almost all proceeds to shareholders. This means that when a stock or bond within the fund's portfolio pays dividends or interest, that money must then be distributed to the fund's shareholders so the fund is not required to include it as income. Individual shareholders then report that investment income on their taxes for the year. The same is true if the fund makes a profit from the sale of an asset, called a capital gain.

The timing of mutual fund distributions, including dividend and interest payments, is at the discretion of each fund and can vary widely. Generally, funds that generate dividends or interest must make 澳洲幸运5官方开奖结果体彩网:distributions to shareholders at least once a year.

The Bottom Line

Mutual funds can pay dividends, interest, or both, depending on the types of assets they hold. Balanced funds, which invest in both stocks and bonds, may provid🐈e a combination of dividends and interest.