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Mutual fund dividend options

Mutual Funds growth schemes may have provided higher returns than their dividend counterparts during the bull run. But not any more! Dividends paid in the past five years have not only saved investors from the market tsunami, but also ensured higher returns

Mutual fund (MF) houses and their distributors often use dividends as a carrot to lure investors to their schemes. Dividend, in common parlance, is understood to be a share in the profits of the company in which the investor has a stake (shareholding). However, in case of an MF scheme, dividend is nothing but a part of the capital appreciation of the investment returned back to the investor in piecemeal. It is for this reason that the net asset value (NAV) of a scheme stands reduced to the extent of dividend declared by the MF scheme.

Dividend and growth are the two basic options that an investor can choose from while investing in an MF scheme. Unlike the dividend option, growth invests any appreciation of initial investment back into the fund and allows it grow further instead of repaying to the investor. It is for this reason that returns generated under the growth option have been higher than those from the dividend option, especially in the bull run. But not any more! The changing tides in the market have made ‘dividend’ an attractive investment option as compared to a growth one. An analysis of returns for the period January ‘04 - December ‘08 of nearly 64 equity diversified schemes reveals so. Returns under the dividend option of more than 60% of them have been higher than those of the growth option. Thanks to the regular dividend payouts, investors have managed to save some of their capital appreciation from the market tsunami. The schemes considered for this analysis are those that have been in existence as on January ‘04 for both the dividend as well as the growth options.

Ignoring the entry loads, we have assumed the returns generated under both the options — for the selected equity schemes — for an initial investment of Rs 1,000 on January 1, 2004. We have also assumed that the investor has held onto the investments till December 2008 — covering the entire period of bull-run and even the disasters unfolding thereafter. All the dividends declared in the five-year period (January ‘04 - December ‘08) have been taken into account to arrive at the total value of the initial investment of Rs 1,000 as on January 1, ‘09.

In this list of schemes where returns from dividend option supercede those of growth ones, Sahara Taxgain and SBI Magnum Taxgain ‘93 are in the forefront . Having paid a total dividend of over 500% in the last five years, their returns under the dividend option are 3.4x and 2.4x higher vis-à-vis their growth ones. This is followed by DBS Chola Growth and UTI Master Value whose returns from dividend option exceed those of the growth option by 2x and 1.6x, respectively. Investors would however do well to note that declaring dividends is the sole discretion of the fund house and the same is never guaranteed. In fact, in the light of the current market situation, only a handful of equity schemes have declared dividends so far in 2009. Dividends should thus not be construed as a decisive factor for selecting a mutual fund investment.

Past performance and the risk appetite of the scheme are the major criteria for selecting a right MF scheme. An investor would also do well to take into account the number of years for which a scheme has been in existence and measure its performance at both the highs and lows of the market.

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