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I'm reading The Little Book of Common Sense Investing by Bogle John, the founder of Vanguard index funds.

In Chapter Six: Dividends Are the Investor’s (Best?) Friend: But Mutual Funds Confiscate Too Much of Them, he mentioned that reinvesting stock dividends can be a huge difference in the long run, but mutual funds will not add that to their net assets, thus "confiscated" them.

My questions,

  1. Why won't the mutual funds add the dividends to its net assets? Or was it totally consumed by their operation fees?
  2. Would index fund add the dividends to its net assets?
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"Confiscate" is a loaded word. Mutual funds have various management costs, but they want to make these seem as low as possible. So they hide fees in other ways, such as keeping (some or all of) the share dividends for themselves.

  1. They could, but they would have to charge you more in yearly fees. And nobody would invest in a fund with high yearly fees.
  2. No, a share price index only tracks the price of the shares.
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    This is incorrect. Funds must disclose total management fees, no matter whether they are taken from dividends or from assets: "a mutual fund or ETF may earn income in the form of dividends on the securities in its portfolio. The mutual fund or ETF then pays its shareholders nearly all of the income (minus disclosed expenses) it has earned." Fees are often taken from dividends, but this is convenience rather than conspiracy: Dividends are already in cash, rather than requiring sale of fund assets and perturbing the NAV.
    – nanoman
    Commented Nov 19, 2023 at 23:35
  • @nanoman Shareholders would still have to declare the full amount of the dividends as taxable (assuming it's earned in a taxable account) though, correct?
    – Craig W
    Commented Nov 20, 2023 at 2:01
  • @nanoman Yes, but it's the fund that's the shareholder, not the people investing in the fund. The investors only need to pay tax on the income they get.
    – Simon B
    Commented Nov 20, 2023 at 9:10
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My mutual funds do pay dividends, and do offer us the option of automatic reinvestment of them (which is what I do). Whether those differences are my full share of the sum of all the dividends of all the fractional stock shares I own indirectly through the funds... I don't know offhand.

You should be able to find this out by reading the fund's prospectus.

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