Skip to main content

Mutual Fund dividend is your own money being returned to you

Take the growth option if you want your investments to grow


   ON NOVEMBER 25, 2010, the net asset value (NAV) of the growth option of Reliance Growth fund was 491.56. On the same day, the NAV of the dividend option of the same fund was 60.26 or nearly 88% lower. Similar is the case with HDFC Equity Fund. The NAV of the growth option of the scheme was 292.07, whereas the NAV of the dividend option was 82% lower at 53.68. What explains the huge difference?


The reason is simple but important. While in the growth option the NAV keeps on growing, in the dividend option, a part of the profit made is given back to you as dividends which leads to a fall in the NAV.


The dividend from a mutual fund scheme, unlike stock dividend, is your own money coming back to you.

Why The NAV Slips:

MFs give out dividends by selling the shares they hold against the investments made by investors. This leads to the NAV of the scheme falling. So, let us say the NAV of a scheme is 12. The MF decides to give a dividend of Re 1 per unit. In order to do that the MF will have to sell shares held against the investments made and give out a dividend. This will lead to the NAV falling by Re 1 to 11.


   And that's what happened with Reliance Growth Fund, which has been declaring regular dividends over the years.


   If you invested in the growth option of the scheme, you would get an NAV of 491.56. If you chose the dividend option, periodically, some of your invested amount would be paid back to you (by calling it dividend) and, hence, the market value of your unit is 60.26.


MF Dividend Is A Misnomer:

An equity fund manager recounts the story of an MF investor who kept buying more units using the money given out as dividend by the MF. "He would invest the dividend he got in the scheme again, thinking that the NAV was reducing and so he thought he was investing at a lower price," the fund manager recounts. But all the investor needed to do was to choose the growth option of the MF and see his investments grow. In the growth option of an MF scheme, the amount invested keeps growing and no dividends are paid out.

 
   In the strictest sense, the term dividend is a huge misnomer when it comes to MFs. Let's take the example of a stock priced at 200 where the company announces a dividend of 5 per share. Here, the dividend will be is over and above the stock's price and serves as a means of distributing additional money to shareholders from the company's reserves and surplus.


   The tragedy, of course, is that most MF investors think that dividends given by mutual funds are like dividends given by companies on stocks. They think dividend is new money being given to them and fail to realise that it is their own money that the MF is returning to them.

The Lure Of Dividends:

You feel happy when you get a substantial dividend of say 30,000-40,000 on an investment of 5 lakh in case the dividend declared by your mutual find is 9-20%.


   Usually, dividends are declared annually There are also people who aim at profit-booking in the form of dividend as they think market can't go perpetually high and so take a dividend option.


   However, calculations reveal that money grows faster under the growth option than with the dividend option. In equity schemes, in a market environment which is bullish, the growth option will give you a better upside. Take for instance, 1,000 invested in the Birla Sunlife Dividend Yield Plus Plan. The money in a growth fund would have increased in three years to 1,812 and to 2,914 in five years. The same amount invested in the dividend option of the scheme would have grown to 1,715 in three years and to 2,300 in five years.

The Regular Income Myth:

Let us look at the number of times that some of the equity funds such as Birla Sunlife 95 and HDFC Equity Fund have given dividends. In the 10 years since its launch, HDFC Equity Fund gave 14 dividends, mostly once in a year and on rare occasions twice a year, especially when the markets had run up.


   HDFC MF pays dividends in fixed months. It has been following that system for years. So, next year, it will give dividends in that very month. Accordingly, one can plan the expenses and the cash flow from dividends. But there is a slight problem in the argument. One never knows how much one would receive and when. In other words, the MF may decide not to distribute the dividend at all. Or, it may decide to distribute much less than what you need. Typically, equity schemes declare an annual dividend but there is no guarantee that you will get dividends. This is because the dividends are dependent on how the markets are moving.

Growth Is The Way To Go:

So, given this, what should an investor do? He should invest in the growth option. And as far as dividends are concerned, There is a simple solution. Ask for the dividend yourself. To put it differently, when the MF pays you money, it is called dividend. When you yourself withdraw an equivalent amount, it is called capital gain.


   So, basically, whenever you need a dividend, just sell a few units of the MF. In the dividend option, as we explained above, the MF is returning you your own money, which is what you do when you choose to sell the units of the growth option as well. The value of your investment remains the same, whether the dividend is paid to you by the MF or whether you redeem units of an equivalent amount.


   So, moral of the story is, go for growth, if you want your investments to grow.

GROWTH PAYS DIVIDENDS

1 dividend MFs give by out a selling the shares that they hold
2 scheme The NAV falls of the by as much as the dividend declared

3 sell You the can MF units to give yourself a dividend anytime

4 for Hold one the units year before selling to avoid paying taxes Those who
5 want regular income should know that MFs do not pay dividend frequently



 

Popular posts from this blog

Axis Mutual Fund NFO - Axis Fixed Term Plan Series 18

Axis MF has announced that the NFO period of Axis Fixed Term Plan Series 18 (15 Months) under Axis Fixed Term Plan Series 17 19 has been preponded from February 27 to February 24.        --------------------------------------------- Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.   Invest Tax Saving Mutual Funds Online Tax Saving Mutual Funds Online These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving)   Download Tax Saving Mutual Fund Application Forms from all AMCs Download Tax Saving Mutual Fund Applications   These Application Forms can be used for buying regular mutual funds also   Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds ) HDFC TaxSaver ICICI Prudential Tax Plan DSP BlackRock Tax Saver Fund Birla Sun Life Tax Relief '96 Reliance Tax Saver (ELSS) Fund IDFC Tax Advantage (ELSS) Fund SBI Magnum Tax Gain Schem...

Budget 2014 Highlights for Saving

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   The new finance minister Arun Jaitley has just presented his first budget. What measures does the budget contain that will specifically impact savers and investors? Here they are: 1. Housing loans exemption for self-occupied properties increased to Rs2 lakh: Earlier this amount was Rs1.5 lakhs. This move barely keeps pace with the inflation in asset values.   2. Investment limit under 80 (C) increased to Rs1.5 lakh: This is a good move again and offers some relief to taxpayers.   3. IT exemption increased to Rs2.5 lakh, Rs3 lakh for senior citizens. This comes as a minor relief for taxpayers.   4. Annual PPF ceiling to be enhanced to Rs1.5 lakh, from Rs1 lakh: This is in tune with the change in 80C.   5. Long term capital gains tax for debt funds has been rai...

Franklin India Taxshield

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)   This fund maintains a quality portfolio of large-cap orientation. The fund manager adheres to a bottom-up investment approach and looks for companies whose current market price does not reflect future growth prospects. Investments are in companies that can drive future earnings growth. Stocks are selected based on the company's financial strength, management's expertise, growth potential within the industry, and the industry's growth potential.   The portfolio is well-diversified across sectors and market capitalisation and follows a blend of value and growth style of investing. The fund follows a predominantly large-cap allocation of over 70 per cent, with small-cap allocation never exceeding 10 per cent since inception.   Performance The fund doesn't dev...

ELSS Funds for different Risk Profile

Match your Goals Risk Profile With ELSS Investment   DIFFERENT TRACKS Unlike funds with a clearly defined investment universe -- large-cap, mid-cap or multi-cap - Tax Saving Schemes do not specify investment focus If you are looking for an equity Linked Savings Scheme (ELSS) to pare your tax burden, the plethora of options may confuse you. Many investors simply opt for ELSS funds , also called tax saving schemes with the best return over a certain time period. However, this may not yield the best results. There are several types of ELSS funds and it requires a nuanced approach to pick the right one. DIFFERENT RISK PROFILES Unlike funds with a clearly defined investment universe -- large-cap, midcap or even multi-cap schemes in the ELSS category do not specify their investment focus. While these schemes have the flexibility to invest anywhere, most tend to follow a defined template. For instance, some funds take a distinct large-cap tilt with a limited exposure to mid or small-cap st...

Reliance Tax Saver Fund Online

Invest in Reliance Tax Saver Fund Online   ----------------------------------------------- Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds Top 10 Tax Saving Mutual Funds to invest in India for 2016 Best 10 ELSS Mutual Funds in india for 2016 1. BNP Paribas Long Term Equity Fund 2. Axis Tax Saver Fund 3. Franklin India TaxShield 4. ICICI Prudential Long Term Equity Fund 5. IDFC Tax Advantage (ELSS) Fund 6. Birla Sun Life Tax Relief 96 7. DSP BlackRock Tax Saver Fund 8. Reliance Tax Saver (ELSS) Fund 9. Religare Tax Plan 10. Birla Sun Life Tax Plan Invest in Best Performing 2016 Tax Saver Mutual Funds Online Invest Online Download Application Forms For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call --------------------------------------------- Leave your comment with mail ID and we will answer them OR You can write to us at PrajnaCapital [at] Gmail [dot] Com OR Leave a mis...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now