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

Am you Required to E-file Tax Return?

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   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...

Section 80CCD

Top SIP Funds Online   Income tax deduction under section 80CCD Under Income Tax, TaxPayers have the benefit of claiming several deductions. Out of the deduction avenues, Section 80CCD provides t axpayer deductions against investments made in specific sector s. Under Section 80CCD, an assessee is eligible to claim deductions against the contributions made to the National Pension Scheme or Atal Pension Yojana. Contributions made by an employer to National Pension Scheme are also eligible for deductions under the provisions of Section 80 CCD. In this article, we will take a look at the primary features of this section, the terms and conditions for claiming deductions, the eligibility to claim such deductions, and some of the commonly asked questions in this regard. There are two parts of Section 80CCD. Subsection 1 of this section refers to tax deductions for all assesses who are central government or state government employees, or self-employed or employed by any other employers. In...

ULIP Review: ProGrowth Super II

  If you are interested in a death cover that's just big enough, HDFC SL ProGrowth Super II is something worth a try. The beauty is it has something for everybody — you name the risk profile, the category is right up there. But do a SWOT analysis of the basket, and the gloss fades     HDFC SL ProGrowth Super II is a type-II unit-linked insurance plan ( ULIP ). Launched in September 2010, this is a small ticket-size scheme with multiple rider options and adequate death cover. It offers five investment options (funds) — one in each category of large-cap equity, mid-cap equity, balanced, debt and money market fund. COST STRUCTURE: ProGrowth Super II is reasonably priced, with the premium allocation charge lower than most others in the category. However, the scheme's mortality charge is almost 60% that of LIC mortality table for those investing early in life. This charge reduces with age. BENEFITS: Investors can choose a sum assured between 10-40 times the annualised premium...

FCCB buyback

WITH dismal share valuations causing bondholders to redeem, and not convert their foreign currency convertible bonds ( FCCBs ), which until early this year were regarded as one of the most preferred options for raising corporate debt, suddenly seem to have become millstones around the necks of issuers. It is the redemption pressure on cash-starved issuers, coupled with the need to preserve liquidity by mitigating further forex outflow, which seems to have prompted the Reserve Bank of India ( RBI ) to issue the circular permitting buyback of FCCBs. As per the circular, issuers can now buyback FCCBs under the automatic route up to any limit out of existing foreign resources or by raising fresh external commercial borrowings (ECBs,) if effected at a minimum discount of 15% on the book value. Further, FCCBs up to $50 million can be bought back with prior RBI approval out of rupee resources representing “internal accruals”, if effected at a minimum discount of 25% on the book value. I...
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