The last three months of a financial year witnesses a lot of dividend declaration by mutual funds. This results in a lot of investor attention.
A lot of excitement is generated among investors as the dividend is declared. But the declaration of the dividend does not actually provide any benefit, as it involves just the payout of the gains already earned. It is only the rise in the value of the fund that actually gives the investor a gain in their investments. Here is a look at some aspects of the dividend declaration process.
Rate: The first aspect related to dividends that an individual investor will come across is the rate of the dividend.
This is important as it determines the amount of dividend that will actually be paid by the mutual fund.
The dividend rate is applicable for all investors in the dividend option of the fund and it does not impact those who have selected the growth option.
While all investors look for a higher dividend rate, it is just not the rate that determines the amount of dividend that they receive. The base for the calculation is important and when the base for the calculation is the same then the investor would prefer a higher rate of dividend.
Face value: The dividend payout will be based on a specific value and this will be clearly specified by the fund when it declares the dividend. When it comes to most funds the dividend is declared as a percentage of the face value of the fund.
This does not involve net asset value (NAV), and hence, this will end up as a different percentage of the current value as compared to the face value.
Consider an example where the NAV of a fund is Rs 40 and the face value is Rs 10. If the dividend is declared at 60 per cent then this will be Rs 6 per unit. In percentage terms, it is just 15 per cent of the current value. For an investor who has bought the units at Rs 10, the dividend will be the actual 60 per cent. For someone who has bought the units at Rs 20, the dividend will be 30 per cent of their cost even though they receive Rs 6 per unit.
Distributable surplus: Another aspect of dividend that confuses a lot of people is when dividend is declared as the distributable surplus. In case of various funds, especially debt-oriented ones such as fixed maturity plans that are close-ended in nature, there has to be a final dividend paid at the time of the closure of the fund.
In such a situation, the fund will not know before the final date of operation as to what is the exact earning of the fund. If the fund wants to pay out the entire amount to the investor then there can be uncertainty that can arise in the matter.
This is the reason why funds announce 100 per cent of the distributable surplus. When this is the case then the entire earnings made by the fund till the date of the dividend will be considered as the figure for the payout.
Some amount of confusion arises for investors who think that this means there will get 100 per cent dividend. This is not the case, and hence, they need to be careful when they are comparing various percentages.
This figure might turn out to be less than a smaller figure elsewhere, because the distributable surplus might be quite small in terms of percentage of the face value of the fund.
