Experts say dividend on a mutual fund scheme is mostly a gimmick used to attract investors MF experts say there has been rationalisation in dividend declared after Sebi's order
HIGH dividend payouts from the mutual fund company is not the real indicator of a fund's performance and one should not invest in mutual funds based on dividend payouts, say mutual funds experts.
Unlike stocks where dividend reflects performance of the company, dividend paid on a mutual fund scheme does not reflect a fund's performance. One should look at historic performance of the fund.
Unlike corporate dividends, where the firm distributes surplus, high mutual fund dividend does not really mean that the fund is performing well. Fund experts say there's no difference between an investor redeeming a part of mutual fund and a fund company paying a part of your returns in the form of dividend.
Till now, more than 135 equity schemes have paid dividends this year. The dividend paid is as high as 80 per cent in some cases.
For example, if the net asset value (NAV) of a fund is Rs 30 and it declares a dividend of 10 per cent, that is Rs 3 per unit, the NAV will drop to Rs 27 on the day the dividend is paid out. This is because the dividend is taken out of the NAV.
Dividend is redemption of the returns that your money has earned. An investor should not get carried away by the dividends paid by a fund house. One should look at the fund's performance to make investment decisions.
Dividend in mutual fund is mostly a market gimmick. It is not a return on capital, but mostly returning a part of your capital. Through dividend your own money is coming back to you. One should look at historical returns and performance of a fund and then only make any investment decisions.
However, mutual fund experts say there has been some rationalisation in dividend declared since the Securities and Exchange Board of India's (Sebi) order in March this year tightening the norms regarding the payout of dividends on mutual funds.
Sebi had ruled that funds would be able to pay dividends only out of accumulated returns and not out of money that is invested by unit holders. Taking a decision on which fund to buy based on past dividends declared is not appropriate. But things will change now subsequent to the Sebi order.
Mutual fund houses use dividends as a marketing tool to attract new investors mostly in the second half of the financial year to get a share of tax saving investments into their tax-saver funds.
Any investment decision depends on the goals of an investor. If an investor is looking at regular income in the form of dividends, he should opt for such plans. At this point of time, different variants of any financial product is available. It all depends on the customer.
