What does dividend in a mutual fund scheme mean?
As part of their portfolios, mutual fund schemes hold securities. These securities are churned based on various parameters such as price and fundamentals, among others. When a scheme makes a profit through these transactions, the fund manager, at times, doles out dividends to the unit holders.
A scheme could register gains also on account of dividends announced by the companies whose shares are held under the scheme. Even bond schemes can pay dividends as the debt papers in which the scheme invests pay interest.
How does dividend impact the net asset value (NAV)?
The NAV is the price of each unit of a mutual fund scheme. It reflects the total value of the underlying securities. If such securities are sold in order to book profit and distribute dividend to the unit holders, then the NAV would be proportionately affected. Hence, after every dividend announcement, there is a fall in the NAV to reflect the payouts.
Is dividend an additional income for unit holders?
It is important to remember that dividends are not additional income for the unit holders. The mutual fund is selling the shares held in the scheme and distributing the dividends from the profits earned through such a sale. So, essentially, the mutual fund is withdrawing money from the scheme itself and paying the unit holders post which the NAV would take a hit to the extent of the dividend.
Do all schemes give dividend?
Not necessarily. Dividend payouts depend on the scheme’s performance. During a downturn in the market, schemes might not announce a dividend. Also, one can keep in mind that most equity schemes have two options — dividend and growth. Under the dividend option, investors get payouts whenever a dividend is announced. In a growth option, the dividend is reinvested in the scheme and the unit holder gets additional units in lieu of the dividend. So, while the NAV might still take a hit, the unit holder will have more units.
Does low NAV mean poor performance?
Again, not necessarily. NAV is based on many factors, including the total AUM of the scheme. A fund manager may decide to do regular dividend payouts that would bring down the NAV even though the scheme may be faring pretty well.
One should look at the track record of the fund rather than just the NAV before investing in a scheme. Also, a lower NAV means an investor will get more units compared to a scheme that has a higher NAV. Interestingly, the dividend is based on the face value of the units and not on the NAV and hence, more the number of units, more would be the absolute dividend received.
