Skip to main content

Mutual Fund dividend – Does it measure the Fund Performance?

Buy Gold Mutual Funds

Invest Mutual Funds Online

Download Mutual Fund Application Forms

Call 0 94 8300 8300 (India)

A couple of weeks ago, I wrote about SEBI's tightening of the regulations regarding the payout of dividends in mutual funds. Sebi had ruled in March that henceforth, funds would be able to pay dividends only out of accumulated returns and not out of money that is invested by unit holders. As a result, some funds may not be able to pay dividend as liberally as they'd like to in order to attract investors.

However, it is unlikely to make any dent at all in the basic problem — that of investors being attracted to funds because of dividends. Investors will continue to think the better of those funds that pay out higher dividends, and funds will continue to pay out dividends in order to attract investors. Granted, such dividends will be paid out under SEBI's new accounting rule, but in terms of investors' understanding, that's neither here nor there.

In a curious way, in the matter of dividends, Indian investors are often guilty of evaluating stocks like mutual funds and mutual funds like stocks. In India, investors rarely pay any attention to the dividend yield of stocks, or even of a company's dividend track record as an indicator of its attractiveness as an investment; which is something that they should be doing. Instead, they like to just look at its recent price performance and draw their conclusions.

On the other hand, dividends are a great seller of mutual funds, where they are not only irrelevant but — in a manner of speaking — non-existent. The very idea of comparing two funds' desirability on the basis of dividend should be a non-starter because the fund dividend is actually not a dividend at all. Instead, it is just a redemption of the returns that your money has already earned and that already belongs to you, whether you get it as a redemption or under the name of 'dividend'. Fund dividends are not dividend at all.

Corporate dividends are evidence that a company is generating distributable surplus. Fund dividends are nothing of the sort, in fact they are evidence of nothing at all. The only evidence of a fund's performance is its NAV, and that's yours, regardless of anything.

The most interesting part of this widespread misunderstanding is the arithmetic of fund dividends. Let's say, there's a fund whose NAV is Rs 30 and it declares a dividend of 10%. That's 10% of the face value of Rs 10 so the dividend is going to be Rs 3 per unit.

The day the dividend is paid out, the NAV will drop to Rs 27 because dividend is taken straight out of the NAV. There's no financial difference at all between a situation where an investor has redeemed Rs 3 per unit and one where the fund company has paid out a Rs 3 per unit dividend. All that the fund company has done is to satisfy investors' irrational hankering after dividends and in the process made a marketing pitch to such investors.

However, there is a practical difference. As an investor redeeming your money, you control what you redeem yourself. When it's called dividend, the timing and size of the payout arises out of someone else's agenda.

Apart from the audience of knowledgeable investors of the sort who proactively try and understand this issue, I doubt there's any practical chance of people understanding the concept. Except, perhaps, if SEBI renames fund dividends as something else, as it did with NFOs. 

--------------------------------------------

Invest Mutual Funds Online

Transact Mutual Fund Online

Download Mutual Fund Application Forms from all AMCs

Download Mutual Fund Application Forms

Best Performing Mutual Funds

    1. Largecap Funds        Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Birla Sun Life Front Line Equity Fund
    2. Large and Midcap Funds     Invest Online
      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
    1. Mid and SmallCap Funds    Invest Online
      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
    1. Small and MicroCap Funds             Invest Online
      1. DSP BlackRock MicroCap Fund
    1. Sector Funds              Invest Online
      1. Reliance Banking Fund
      2. Reliance Banking Fund
    1. Gold Mutual Funds             Invest Online
      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund

Popular posts from this blog

Understanding Your Cibil Credit Information Report

   WE ARE all familiar with the anxiety and uncertainty that we feel when applying for a loan. After all, it's the lender who decides whether we can own our dream home, our first car, or whether our children can pursue higher education. In a nutshell, a better life depends on the lender's decisions.    While other factors do play a part in the lender's decision, the Cibil Credit Information Report ( CIR ) plays a crucial role in a lender's decision to approve a loan application.    Previously, lenders would treat all loan seekers equally. Each applicant, if approved by the lender's internal credit policy, would be charged at the same interest rate for a particular loan size and purpose. The lenders would charge a higher interest rate to all the borrowers, in order to compensate for the possible default of a small portion of the loan disbursed. In other words, it's like a professor (the lender) punishing an entire class (borrowers) for the mischief played b...
Read more

Myths about Exchange Traded Funds (ETFs)

1) ETFs Are Similar to Individual Stocks: Like MFs, ETF consist of an underlying portfolio of securities that's designed to follow a specific index or investment strategy. Hence, they are as diversified as various mutual funds. 2) ETFs Only Invest in Equity: Since they are listed on the exchange, the general belief is that ETF only consists of equity asset class. Globally, ETFs are available across asset classes – equity, debt, commodities, real estate and so on. In fact, over the past couple of years, India has also seen the emergence of Gold ETFs. 3) All ETFs Are Index Funds: ETF started as a fund which used to track indices and hence they were branded as index funds that are listed. However, ETFs have progressed rapidly and are no longer associated only with passive index funds. Globally, we have seen the launch of actively-managed ETFs. In India, also we recently saw the emer gence of fundamentally-weighted ETFs on Nifty, which busts the myth that ETFs are index funds and can...
Read more

What are the factors affect the changes in Interest Rate of Fixed Deposits?

  What are the factors affect the changes in rate of Fixed Deposits? Fixed Deposits are now considered to be a very old fashioned method of saving, but still attract many investors since they have guaranteed returns at the end of the tenure of the investment at a decent interest rate. There are various factors that affect the rates of interest for a Fixed Deposit. Policies of the Reserve Bank of India   - The several norms and restrictions posed by the Reserve Bank of India , in order to gain optimum control over credit and inflow and outflow of fund throughout the country. The repo rate changes, cash reserve ration tends to change and these changes affect the banking products like Fixed Deposits, loans etc. Recession   - When unemployment in a country crosses the benchmark set Recession hits, and slowly the country faces an economic slow movement, affecting the purchasing power of the people in the country, forcing the Reserve Bank of India to release more funds in the financial marke...
Read more

REC Tax Free Bond Issue

Tax Saving Mutual Funds Online Current open Infra Bond Application form   Download REC Tax Free Bond Application Forms REC (Rural Electrification Corporation) is going to issue tax free bonds and the issue will open on March 6 2012 and will close on the 12th of March 2012 When you buy 80CCF infrastructure bonds, the amount you invest in those bonds get reduced from your taxable income but in these bonds that's not going to be the case. The interest on these bonds will be tax free and they are similar to the other tax free bonds like the HUDCO, NHAI and PFC issues. For the two of you interested in knowing this – these bonds are tax free under Section 10(15)(iv)(h) of the Income Tax Act. Now on to the issue itself and let's start with the high credit rating that the issue has got. The REC tax free bond issue has been given the highest rating by all issuers since the government owns the majority stake (66.8%) in REC, it has been consistently profit making,  this is a se...
Read more

Mutual Fund Review: ING Dividend Yield

  ING Dividend Yield's small assets enable the fund manager to churn in impressive returns… Strategy The aim of the fund is to invest in stocks which offer a high dividend yield. This fund deploys a value based strategy which aims to gain from investing in fundamentally strong and free cash flow generating businesses. The scheme focuses not only on growth but also on the cash generated by the business, which mostly leads to stable returns even in volatile markets. This fund has a low volatility because of its investment in high yielding stocks. The scheme tries to include stocks that yield dividend above the dividend yield of the Nifty and stocks with liquidity, which throws up a universe of 150 stocks.   Our View Launched in October 2005, this fund invests at least 65 per cent of its assets in high dividend yield stocks. The fund has consistently maintained a mix of stocks across varying market capitalisation, with a higher tilt to mid caps compared to small caps. Howev...
Read more
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