The World of Investments and Money

Saturday, December 30, 2006

How do Mutual Funds calculate dividend

MFs normally pay dividend periodically if they are dividend based (D). Growth based mutual funds (G) pay dividends rarely. (D) type mutual funds pay dividend when they make a profit by the trading they have done in the market. It depends upon the fund managers how much percentage of the profit they want to reinvest and how much they want to give back to investors. That money being given back to investors, minus any taxes etc, divided by the number of Units is the dividend per unit. MFs give it a fancy percentage by calculating it from the face value of the unit which is 10. So even if the book value (that is present unit price) is, say 100, the dividend percent is still calculated based on 10. So a 25 dividend per unit would be called a 250% dividend, although it is only 25% of its present price, since it is calculated based on the face value of 10.
Growth oriented MFs pay dividend sometime if the fund has made profit and fund managers find extra cash which is not likely to be invested.


Vivek Sinha said...

Hey, its very nice information... could you tell me if the time is also a factor in divident.. example, if A invested 1000 rupees for 6 months and if B invested 1000 rupees for 3 months... then would MF give divident for the period invested?

PS: the font size of your blog is very small, maybe you should consider changing the blog template.

Anonymous said...

MFs don't give dividend based upon the period of investment since it really doesn't matter. The money they give back as dividend is investor's money. After getting the dividend, the net investment for the investor decreases by the amount he gets as dividend.
So, if your investment in MF before dividend is say 12000 and you get 2000 as dividend, your investment decreases to only 10000 after you get the dividend. MF just gave you back a part of your investment as it haven't been able to invest it.

What matters more is that A, who invested the money for 6 months would normally gain more than B because MF would have made more profit in the longer run.

The main thing to keep in mind with Mutual Funds is that it is not the Units allocated to you, or NAV or the dividend paid that matters. It is the amount of money one has invested that counts.


Anonymous said...

Hi! Just wanted to get some more clarity on this. You stated that when a dividend is paid out the investment value comes if I invested 12000 and recieved 2000 as dividend in a tax saver MF, does that mean my total investment value comes down to Rs.10000 or does it have to do with the number of units allotted to me? Essentially what kind of impact does it have to me from a 3 yr perspective considering that it is a tax saver fund?

Anonymous said...

If you get 2000 as dividend out of 12000 invested, the value of your investment comes down to 10000. Also, the NAV comes down. Total units alloted to you remains same.

For a tax saver fund, you can show initial amount that you have invested i.e. 12000 for the purpose of tax relief, though.


Shankar Shinde said...

Hi, This is very useful information, as to understand based on what the dividend is calculated. I have one question on tax saving. I have invested in a fund having 3 yr lock in period. I invest in the 1st year only and I dont invest in 2nd and 3rd. Can I avail tax exemption on this invested amount in the 2nd and 3rd year?

Anonymous said...

Mr Shinde, the tax benefit is only for one year i.e. for the financial year in which you invested the money. The lock-in period is for 3 yrs for tax relief funds. To avail tax benefit for 2nd yr, you have to make a fresh investment that will again be locked-in for 3 yrs from the date of investment.


Parag said...

The yield of a mutual fund evaluates the investment performance of the mutual fund by measuring the dividend income that the mutual fund pays to shareholders, as a percentage of their investment, after deducting any fund expenses.
Dividend mutual funds

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