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
