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Fancy dividend percentages by Mutual Funds can be misleading


Mr. Rao recently invested Rs 2,00,000/-  in the dividend option of a equity scheme of a leading mutual fund house on the suggestion of his financial advisor. Some days back, he got an sms from the mutual fund informing him that a 60% dividend had been declared on the mutual fund scheme and would be credited into his a/c in a few days. Mr. Rao was very happy to hear this and was glad to have made the right investment decision and receive a huge tax free dividend.

A few days later the dividend was credited to his a/c. He was shocked to see the amount. It was around Rs. 12,000/- which was hardly 6 % of his investment amount. He was unable to understand how a 60 % dividend declared could be such a small sum.

Here is the explanation:

The current NAV or the price per unit of the mutual fund is around Rs. 100. Let us assume that the markets have been flat for sometime and Mr. Rao also invested at an NAV of Rs. 100; hence he got 200000/100 = 2000 units of the mutual fund. Now, the dividend is calculated on the face value of the mutual fund, which is Rs. 10 in this case. Hence a 60 % dividend actually means a dividend of Rs. 6 per unit, hence Mr Rao received 2000 * 6 = Rs. 12000/-.

Many of the popular equity schemes (see table) have current NAVs which are much higher than the face value per unit which is Rs 10/- in most cases and all these funds have a practice of declaring the dividends as a percentage of the face value which could be misleading to the investor if he is not aware of how this is calculated.

Current Net Asset Values  of some mutual funds-

Scheme Name Current NAV ( as on 20/08/2012)
Birla Sunlife 95 Fund-Dividend 102
Franklin India Index Fund-BSE Plan-Dividend 50
ICICI Prudential FMCG Fund-Dividend 52
HDFC Tax Saver-Dividend 49
Birla Sunlife advantage Fund-Dividend 68

Some other facts –

  • The amount of dividend does not differ based on the period of investment. For eg- If investor A has invested in a mutual fund 6 months back and investor B has invested 2 months back, the percentage of dividend declared would be the same for both of them and the actual amount would depend on the number of units held by each of them respectively.
  • The dividends are paid out of the profits accrued to the investor. Once the dividends are paid, the NAV comes down proportionately and the investment value reduces by the amount of dividend paid. In other words, Current value of the investment post dividend = Value of the investment before dividend – Dividend paid.
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