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

What is Electronic Clearing Service (ECS)?

  As the name suggests, it's an electronic process through which money can be transferred from one bank account to another. According to RBI, this mode is usually used for regular payments and receipts, like distribution of dividend, interest, salary, pension etc. This mode is also used for collection of bills for telephone, electricity, water, various types of taxes, payment of EMIs , investments in mutual funds , payment of insurance premium etc. There are two types of ECS , like most other banking transactions, ECS credit and ECS debit. An ECS credit is used by a bank account holder , usually a large company or an institution for services like payment of dividend, in terest, salary, pension etc. If your mutual fund pays you dividend to your bank account, of all probability it is being paid through ECS credit.ECS debit, on the other hand, is used when a company or an institution is getting money from a large number of people. For example if you are investing in a mutual fund sc...

Equity Savings Fund

Invest Equity Savings Fund Online   The best part about these funds is that they are subject to equity fund taxation and at the same time are structured like MIP like funds . This new category, equity savings funds , offer a little of everything. They allocate money to equities & equity related instruments, and fixed income. They aim to generate returns by diversification. Such funds invest in fixed income and arbitrage to protect the investors from short term volatility and equity for capital gains. The best part of these funds is that they are subject to equity fund taxation and at the same time are structured like MIP funds.   MIP funds however are subject to debt fund taxation. Investors Equity savings funds are suitable for the following: First time investors who seek partial exposure to equity with less volatility and greater stability Investors seeking moderate capital appreciation with relatively lower risk Those wh...

WEALTH TAX

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 WEALTH TAX   WHAT CONSTITUTES WEALTH? For wealth tax purposes, "wealth" means property , urban land, car, jewellery , yacht, boat, aircraft and cash in hand in excess of Rs 50,000. CAUTION POINT | Do not think you will have an easy escape from wealth tax by transferring your `wealth' without consideration to your spouse or minor child. Such assets will also be considered as your wealth. HOW TO DETERMINE YOUR TAXABLE WEALTH Add the taxable value of the above assets (computed as per the detailed rules for valuation) owned by you as on March 31 (for FY 2014-15, it will be March 31, 2015). In case you sold your car during the year, it will not be taxable wealth. Deduct loans if any obtained by you to acquire any of the taxable assets from the value of gross tax out for at least 300 days in a...

How to Pick Top Performing Mutual Fund Schemes

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   How to Pick Performing Schemes  Funds that continue to stay in the top grade of performance over longer periods are the ones to bet on, advise investment experts   The mutual fund performance charts of the past few months make for an impressive reading. Funds across all categories boast of stellar returns. Sample this: The mid and small cap category has averaged 77 percent return over the past 12 months, with the best fund delivering a staggering 120 percent. The tax-saving funds also average an impressive 51 percent, including a fund which has soared 92 percent. Many of the table-toppers are funds of proven quality and track record. However, there are also schemes that are not that well-known. Some of these have rarely made it to the performance charts in the past, yet, of late, they bo...

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...
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