Mutual Fund Options - Dividend Payout

Mutual Fund companies distribute the profits to their unit holders in the form of dividend similar to companies to their share holders. While choosing a mutual fund scheme you can opt for one of the below options

Dividend Payout
Dividend Reinvest
Growth

If you opt for Dividend Payout, whenever the fund announces dividend you will get paid. Funds announce dividend as a percentage of the face value. If you give your bank account details and opt for ECS, the amount will be credited automatically to your bank account. In this case the NAV (Net Asset Value) value will come down proportionately.

Let’s say, Fund A with unit face value of Rs 10 and NAV of Rs 80 announces a dividend of 60% on face value and you hold 1000 units of this fund.

Your investment value before dividend payout = Rs 80 * 1000 = Rs 80,000
Dividend credited to your bank account = (10 * 0.6) * 1000 = Rs 6000
NAV value after the dividend distribution = 80 - (10 * 0.6) = Rs 74
Your investment value after the dividend = Rs 74 * 1000 = Rs 74,000

If your investment horizon is high (Especially if you are young) Dividend payout option is not good. The reason being, most of the times we spend the dividend amount instead of reinvesting. Even if we reinvest it would take some time to do so; effectively dividend amount sits idle for some time.

If you require money periodically for any of your commitments or if you think market would be very volatile (especially bear market expectations) in the future you can opt for this option.
 

 

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November 29, 2009 | Filed Under Mutual Funds 

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