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

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

Capital Protection Oriented Funds

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   Capital Protection Oriented Funds   Erosion of capital is one of the key concerns for investors wanting to invest in equity mutual funds. To address this concern, asset management companies have launched Capital Protection Oriented Funds (CPOFs). What are CPOFs? CPOFs are generally three to five-year, closed-ended funds where 70-80% of the portfolio is invested in fixed income securities, which mature on or before the scheme's tenure. The investment in fixed income securities grows to 100% at the end of the tenure, providing the investor with capital protection. The remaining portion (20-30%) is used to take exposure to equity, which provides the upside. Exposure to equities is either by directly buying equity stocks (plain vanilla CPOFs) or by b...
Read more

About CRISIL IPO Grading

CRISIL IPO (Initial Public Offering) Grading is an opinion on the fundamentals of the graded issue that reflects CRISIL's independence and expertise. This opinion is expressed as a relative assessment in relation to other listed equity securities in India. The assessment is based on a grading exercise carried out by industry specialists from CRISIL Research. A CRISIL IPO Grade 5/5 indicates strong fundamentals and a CRISIL IPO Grade 1/5 indicates poor fundamentals. CRISIL IPO Grading reflects its assessment of the graded company's equity fundamentals as distinct from an assessment of debt fundamentals. A CRISIL IPO Grade should not be construed to mean a comment on the price of the graded security nor is it a recommendation to invest or not to invest in the graded security. However, this grade is not an opinion on whether the issue price is appropriate in relation to the issue fundamentals. The grade is not a recommendation to buy / sell or hold the graded instrument, or a comm...
Read more

New changes in capital gains tax

  ONE of the important mid- to long-term investment avenues where individuals invest their savings is equity and mutual funds. Also, Employee Stock Option Plans ( ESOPs ) have been used as an important tool by the companies, especially the start-up businesses and unlisted companies planning to go for IPO in near future, to attract, retain and motivate employees. One of the key attractions in respect of the equity shares/specified securities listed in a stock exchange is the nil/lower tax rate in comparison with other investment assets. This is, however, set to change in view of the revised discussion paper on Direct Taxes Code. Long-Term Capital Gains If shares are held by the tax payer for more than 12 months, then gains arising from their sale/transfer are treated as long term capital gains. If the period of holding is lower, then such gain is treated as short term capital gains.    Long term capital gains arising from the sale of shares listed on a stock exchange in India on wh...
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