There is a lot of difference in dividend from shares and dividend from mutual fund. The dividend from shares is given from the profit of the company. It shows the company’s robust performance and strong balance sheet. On the other hand, dividend from mutual fund is declared only to reduce the NAV of the fund.
A mutual fund has just declared dividend and your broker has called you up asking you to invest in the fund. Before you rush off to take out your chequebook to sign a cheque to give to your broker, wait. Don’t be in a rush, as there is a dividend from a mutual fund house is a misnomer. Here we take a look at what dividend is, why mutual fund dividend is not a true dividend and why investing just for the sake of dividend can make you poorer.
What is dividend?
A dividend is the income you earn from investment in shares or mutual funds. It is declared from the profits earned by the company or fund house.
What is the difference between the dividend from shares and dividend from the mutual fund?
Well, there is a lot of difference in dividend from shares and dividend from mutual fund. The dividend from shares is given from the profit of the company. It shows the company’s robust performance and strong balance sheet. On the other hand, dividend from mutual fund is declared only to reduce the NAV of the fund. So once the fund house declares the dividend, the NAV falls by the amount of dividend declared. E.g. assume the NAV of the fund is Rs 100. Now it declares a dividend of 10% i.e. Rs 1 per unit. Once the dividend is paid out, the NAV now becomes Rs. 99 (original NAV – dividend declared). On the other hand, dividend from share, does not affect its share price, which is actually decided by the market demand and supply of the company’s stock. So if the company, whose share price is Rs 100, declares a dividend of Rs. 10, it will not affect the company’s share price. It may be Rs. 80 or Rs. 130 depending on the market circumstances.
My advisor has asked to invest in a fund that has just declared a dividend. Should I go for it?
Unfortunately, many fund houses as well as brokers are familiar with the general attitude of people to earn easy money. So fund houses frequently declare a dividend in order to entice public to invest in their schemes. This fact is misused by the brokers who use this fact to aggressively market this fund’s scheme. They mislead the public by telling them that dividend from shares and dividend from mutual fund are same. This takes gullible public for ride, who end up investing in these schemes.
What are the drawbacks of investing solely for the dividend?
This approach to investing is fraught with many pitfalls. Here are some of them.
- Dividend from mutual fund does not help in capital appreciation, since the NAV of the fund reduces by the amount of dividend declared. This makes you lose out on the power of compounding.
- You can choose the wrong fund, simply to earn dividend.
- If you are investing in a fund, just to earn dividend as income, you would be in for nasty surprise as these dividends are not guaranteed. In case if the fund doesn’t perform well, it may not declare dividend.
Always understand the difference between the dividend from shares and dividend from mutual fund. Don’t invest in the fund just for the sake of dividend. Rather look at the fund from the view of your risk profile, your goal, the fund’s performance, volatility and track record, before investing in it.
Though context on this article is true, when compared with growth option or dividend option in MF investments, dividend option is better for simple reason when the markets are on high the dividend yield are generally high in way a kind of profit booking for the investor(which happens to be tax free also) who are cannot decide when to make profit booking.
As mentioned, which option you choose depends on your specific goals. If you are looking to earn an income or want to use the money for some specific purpose, then definitely a dividend option is good for you. But if you are looking to save for a long term goal like retirement plan or financing your child's education, then the growth option is the best, since you will get capital appreciation which is not possible in case of dividend option.
This article is a complete non sense, with the author not aware of the basics of dividend.The article cites an example of 10% dividend equating it to Rs.10 per unit.Wow..A layman can also calculate this better than the author.It is not Rs.10 per unit but Rs.1 per unit. as dividend is calculated on the face value and not the present value of NAV.Please check before writing such stuffs
Hi Rishi,
Thanks for dropping by and taking the time to present your feedback. The error has been corrected based on your feedback.
I think that the author of the article is not thoroughly familiar with the finance domain (Especially with the stock market domain).
If dividend is declared on shares then the price of the shares will fall with the same amount on the ex-dividend date. But then it will rise or fall according to demand – supply & other market factors.
Now consider that a fund also declares dividend & the above mentioned security has a big percentage of weight-age in that fund & on ex-dividend date that particular security is gaining or losing then the price will affect the fund accordingly.
Only one thing which is mentioned by the author is one has not to take the M/F for dividends. No doubt that shares are the best buy for dividends compared to M/F & an M/F won't rise in the same percentage as a single security will but then in the falling market compared to Growth fund dividend fund are the better option.
On the other hand in the falling market after paying the dividend stock price can sink 60% or more but a dividend paying fund wont fall directly 60%.