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THERE is a possibility of making a wrong decision while investing in mutual funds if the factors considered for the decision are not properly understood. If there are any doubts, then it's better to seek clarifications, rather than make some assumptions on your own. Here is a common mistake that can prove to be costly.
Dividend reinvestment option: In this option offered by mutual funds, there is a dividend earned by the investor who has put money into the fund. This dividend, unlike the dividend payout option, is not paid to the investor in cash, but, it is reinvested back in the fund, and the investor is allotted additional units for the value of the dividend that is earned.
This ensures that the investor is able to reinvest the amounts and, hence, grow the investments over a period of time. A common problem is not understanding the cost of the investment. The fund statement is likely to show the original investment plus the value of the dividend reinvested as the total cost.
Critical situation: Most investors, before evaluating the performance of their fund, have a habit of looking at two factors. The first is the cost of holding and the second is the present value of the investment.
However, there are several additional points that need to be considered for making a right decision.
When it comes to the dividend reinvestment option, the net asset value (NAV) of the investment will fall after payment of dividend. On the cost side, it is likely that the figure mentioned in the account statement, which includes the dividend already reinvested, is higher than the present value of the investment.
This might seem to suggest that the investment is not doing too well. Technically, the cost aspect mentioned is appropriate because it represents the cost of the existing units that are bought into the fund and will be useful for making tax calculations.
Factual understanding: When it comes to the actual position on the returns front, the investor needs to take a careful look at what the cost figure represents for them. If they really want to see the kind of returns that they have made or earned, then, they should not just look at the cost mentioned in the account statement, but also, look at some of the workings.
The first thing required is information about the initial investment or total investment in the fund over the entire time period.
This becomes the cost against which the present value has to be compared.
The earnings that are generated by the fund is paid out in the form of dividend, so this is something that needs to be taken into consideration and for the investor, the dividend is just a part of the returns figure. There is a need to separate return calculations from tax workings that the investor needs to calculate and this will not tally with the cost that is shown in the account statement. So, in many cases, when the account statement shows a cost greater than the present value, this might actually not be the case.
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Some of the Top performing Mutual Funds are
- HDFC Top 200 Fund
- ICICI Prudential Dynamic Plan
- DSP BlackRock Top 100 Fund
- Birla Sun Life Front Line Equity Fund
- Reliance Equity Opportunities Fund
- IDFC Premier Equity Fund
- SBI Magnum Contra Fund
- Sundaram Select Midcap
- UTI Dividend Yield Fund
