Financial Daily from THE HINDU group of publications
Sunday, Jun 19, 2005

Investment World
Features
Stocks
Port Info
Archives

Group Sites

Investment World - Mutual Funds
Markets - Mutual Funds


Why the NAV falls when dividend is declared

Every dividend from a fund correspondingly reduces the fund's net asset value as it represents an outflow from the fund.

I am 27-years old. I have invested in three mutual funds — Franklin India Prima Fund, Franklin India Prima Plus and Fidelity Equity — and opted for growth options in all three. What is the difference between growth and dividend options? Why should a fund's NAV fall when dividends are declared? Which option is most beneficial for a five-year term?

-- Anil Johnson

Bangalore

Every equity fund invests your money in a portfolio of stocks. It generates returns from any appreciation in the value of these stocks. The basic difference between the dividend and growth options of a mutual fund lies in the manner of distribution of these returns to a fund's investors.

In the growth option, the appreciation that the fund earns on its portfolio is retained with the fund and allowed to accumulate.

You could realise these gains by selling at the NAV. In the dividend option, this return is periodically distributed as dividend payouts. The fund decides when and how much to pay out as dividend.

Dividends declared by a mutual fund are quite different from the dividends you receive from shares or other fixed return instruments, in the sense that they do not in any way add to the returns that you earn from your investment. Every dividend from a fund directly reduces the fund's net asset value (NAV) to that extent, as it represents an outflow from the fund.

This is because the NAV represents the total current market value of the fund's portfolio, whether held in the form of stocks, bonds or cash.

To take a simple example, assume that an equity fund owns a portfolio that is worth Rs 12,000 at today's prices and has 1,000 units outstanding with investors.

Its NAV would be Rs 12 (Rs 12,000/1,000). As the fund has earned a profit of Rs 2,000 from an appreciation in the value of its shares for this year, it decides to distribute a 20 per cent dividend to its investors.

Investors who are in the dividend option of this fund will receive a dividend of Rs 2 per unit (Rs 2000/100) and will continue to hold units with an NAV of Rs 10 each. Investors who have opted for the growth option will not receive any payout; they will hold units with an NAV of Rs 12 each.

As the dividend option allows you to periodically cash in your profits from the fund, we believe that it is more suitable for investors

  • who have an investment horizon of five years or less

  • who are risk averse and would like to reduce the swings in the value of their portfolio

  • who would like to receive money from the fund on a periodic basis

    However, as an equity fund can pay out dividends only when it has profits available from the stocks in its portfolio, you cannot count on an equity fund for a steady or a regular stream of dividends.

    Please read our detailed story on Page 6 for suggestions on when an investor should opt for the dividend option and when he should go for the growth option of an equity fund.

    (Queries may be e-mailed to mf@thehindu.co.in, or sent by post to Business Line, 859-860, Anna Salai, Chennai 600002.)

    Aarati Krishnan

    Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

  • Right Florists

    Stories in this Section
    Investment quiz


    Colour Chem: Accept at Rs 467.2/Reject at Rs. 318
    Dividend or growth option: No easy choice
    Indexing boosts mid- and small-cap stocks
    Giving telecom the right policy push
    Basic lessons from China

    Bullocks are no milestones
    Sundaram SMILE: Hold
    Principal Resurgent India Equity: Hold
    Why the NAV falls when dividend is declared
    UTI launches Opportunities Fund
    Reliance Industries: Buy
    Gujarat Ambuja Cements: Hold
    Satyam Computers: Buy on weakness
    Tata Coffee: Book profits
    GIC Housing: Buy
    Tax on gains depends on the nature of transaction
    Taxed housewife
    Query Corner
    Firm trend likely in the Nifty
    Bullish outlook for Reliance
    Focus of the week
    Bajaj's confidence built in the Avenger
    Bajaj cruises in with Avenger
    Market ecology
    Nuts and bolts of allotment
    Options guide
    FD options
    `We have contributed to the re-rating of construction stocks' — Mr. R. Balarami Reddy, Director of Finance, IVRCL Infrastructures & Projects
    MSP Steel and Power: Avoid
    Trent: Invest
    Towards the selectively open kimono


    The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription
    Group Sites: The Hindu | Business Line | The Sportstar | Frontline | The Hindu eBooks | The Hindu Images | Home |

    Copyright 2005, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line