Dividend in mutual fund

We all hear about dividend in mutual fund. Each fund house announce dividend time to time depend upon the performance of schemes. Today I am talking about dividend here because some misconception about the dividend. Yesterday when one of my friends was talking about mutual fund investment with me then I had observed that the how much people are confused about this common used term ‘dividend’. So today we are going to understand about dividend in mutual fund.

The first important thing is that the dividend always calculated on the face value of the scheme, not on the fund’s NAV. When any equity fund declares a dividend, the percentage dividend announced is usually calculated on the face value of each unit and not on its latest net asset value. For example one fund’s NAV is Rs 45 and Face Value is Rs 10. If fund house declare 50% dividend, it means Rs 5 dividend per unit on its face value and not 50 per cent of its prevailing net asset value (NAV). That works out to a 11 per cent return on the fund's NAV. Investors often make the mistake of putting money into equity funds based on their dividend announcements. 

The other important thing, dividend declarations by a fund do not add to your returns as an investor. They come out of the fund's overall NAV. After all, an equity fund or debt fund announce dividend after an appreciation in the value of its portfolio. This appreciation is immediately reflected in the NAV of the fund.

When a fund's NAV grows up, it ‘realises' this gain by selling some of its holdings and may decide to return that gain to investors in the form of dividends. That is why a dividend payout usually results in the NAV of the fund dipping to the extent of the payout, immediately after the dividend record date.

If you invest in a dividend option of a fund at an NAV of Rs 100 per unit just prior to a dividend of ‘50 per cent', you will find that you get Rs 5 per unit as dividends and the NAV of the fund falls to Rs 95 per unit after the payout. A dividend payout does not affect growth option investors of a fund, for them the realised gains will be retained in the portfolio and the NAV will remain at Rs 100 per unit, in the above example.

The other important thing is that there is no guaranteed dividend scheme in any mutual fund. It totally depends on the profitability of the scheme and market condition. There are also some equity funds who declare a dividend every year. A fund can only pay out a dividend if it is sitting on capital appreciation on its portfolio and has realised some of those portfolio gains. Equity funds, as all of us know, do not record positive returns every year. 

As no one can predict that the stock market will rise or steadily from year to year, one also cannot expect regular or annual dividend payouts from equity funds. This makes it risky for investors who seek regular income to look to the dividend option of an equity fund, for that requirement.

For those who want fix income in regular interval, the only options are fixed deposits with safe entities or the post-office monthly income scheme. These schemes can really guarantee the regular income.

Dear readers, If you have any query regarding mutual fund or any financial product please feel free to ask.

Warm Regards,

Arvind Trivedi

Certified Financial Planner