Skip to main content

Mutual Fund Investing Basics

 



Dividends and NAVs are widely misunderstood by investors

 

Some time back, I received a fascinating letter from a mutual fund investor. This man is investing regularly in a set of good funds and getting good returns. Even then, he is most unhappy with his investments as he has a set of misconceptions about how the basic arithmetic of fund investing works.

It's an interesting case to discuss as he seems to have combined all the common misconceptions about MFs, adding them up to mental model which has substantial errors. This mental model can easily lead to poor investing decisions. The reason why I'm writing about it here is that all these misconceptions are extremely common, and this case is not at all uncommon.

Here is the gist of the e-mail this investor sent me: I invest heavily in equity mutual funds, and always in the dividend option in order to receive tax-free dividends as income. So far, I have a number of investments in the regular (through a distributor) plans. Now, in order to get better returns, I'd like to invest in direct plans. The problem with this is that direct plans of a fund have a higher NAV and so I get fewer number of units.

Moreover, direct plans give a much lower dividend per unit compared to the equivalent regular plans. Why do direct plans give lower dividends, specially because this problem is made worse by their higher NAVs?

Let's look at the misconceptions here one by one: Misconception: Fund dividends are actual returns, in addition to capital growth

A lot of investors think this is true. The problem lies with the word `dividend' Compared to corporate dividends, this word has a completely different meaning in funds. In funds, dividends are not an additional income but just a withdrawal from your capital. If the value of your investment in a fund is ` . 1 lakh, and the fund gives you ` . 5,000 dividend, then post dividend, the value of your investments will be ` . 95,000. There are no exceptions to this and there is no additional benefit at all. A mutual fund dividend just means taking some of the money that was already yours and giving it to you. Unless you need the income, there is no sense in picking the dividend option in an equity fund. In fact, even if you need the income, it is better to pick non dividend (growth) option to withdraw according to your own needs and schedule. As long as the investment is more than a year old, it is tax-free anyway.

Misconception: Higher or lower NAVs are relevant

This misconception is actively propagated by fund salesmen in order to push new funds, which start at a lower NAV. Actually , all that matters is the investment management of a fund. A fund with Rs 10 NAV and one with Rs 100 NAV will give the same returns if their portfolios are the same. You may have a higher number of units in one, and fewer in the other, but that's irrelevant. If a fund gains 20%, your ` . 10,000 of investment in it will grow to Rs 12,000.This could be 1,000 units at an NAV of Rs 12, or 10 units at an NAV of Rs 1,200; there's no difference. The only use of the NAV of a fund is ` to compare to its own past, which is how you figure out the returns of a fund. Comparing the NAV of one fund to another -which is a common enough activity among investors and fund salesmen -is worse than useless. It's a source of bad investing decisions. It's unfortunate that both these beliefs are widespread, and yet the so-called investor education efforts from the fund industry never tackle them. Clearly, that's because both are used by fund salesmen to pitch funds that may have no other selling point.

Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015

1.ICICI Prudential Tax Plan

2.Reliance Tax Saver (ELSS) Fund

3.HDFC TaxSaver

4.DSP BlackRock Tax Saver Fund

5.Religare Tax Plan

6.Franklin India TaxShield

7.Canara Robeco Equity Tax Saver

8.IDFC Tax Advantage (ELSS) Fund

9.Axis Tax Saver Fund

10.BNP Paribas Long Term Equity Fund

You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds

Invest in Tax Saver Mutual Funds Online -

Invest Online

Download Application Forms

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

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

Leave your comment with mail ID and we will answer them

OR

You can write to us at

PrajnaCapital [at] Gmail [dot] Com

OR

Leave a missed Call on 94 8300 8300

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

Invest Mutual Funds Online

Invest Any Mutual Fund Online

Download Mutual Fund Application Forms from all AMCs

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...

Merger of Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund

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 Merger of Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund Tata Mutual Fund has decided to merge Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund, with effect from January 16, 2015.   Investors of Tata Indo-Global Infrastructure Fund can redeem/ switch out units from December 13, 2014 to January 12, 2015 without paying any exit load. For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call Leave a missed Call on 94 8300 8300 Leave your comment with mail ID and we will answer them OR You can write back to us at PrajnaCapital [at] Gmail [dot] Com --------------------------------------------- Invest Mutual Funds Online Invest Any Mutual Fund Online Download Mutual Fund Application Forms from all AMCs Download Mutual Any Fund A...

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...
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