How can you measure the success of a fund without dividends?

The performance of a dividend-paying fund is often judged by the dividends it distributes over the years. But when it comes to a growth fund, which doesn't pay dividends, how can one evaluate its performance? - Anonymous

First, it is important to clarify that dividend and growth are not two separate types of funds. They are simply two variants of the same mutual fund scheme, and most mutual funds offer both options. The underlying portfolio for both remains identical. The key difference is that in a growth plan, returns are reinvested, leading to an increase in the fund's net asset value (NAV). You realise these returns only when you redeem your investment.

On the other hand, a dividend plan distributes part of the returns periodically as dividends. This means a portion of your gains is redeemed and paid to you. However, a consistent record of paying dividends is not necessarily an indicator of a fund's overall performance. In fact, a fund with regular dividend payouts may still underperform within its category.

To assess the performance of a fund, whether it is a dividend or growth plan, it is essential to compare its long-term returns to its benchmark and other funds in the same category.

For instance, evaluate its returns over extended periods, such as three, five, or seven years. Additionally, do not limit your analysis to returns at a single point in time or the most recent performance. Instead, examine rolling returns, which provide a clearer picture of a fund's consistency over different time periods. This helps determine whether a fund has delivered steady performance across market cycles.

Lastly, it is not always wise to chase the top-performing fund. A fund that consistently delivers above-average returns over the long term is often a better choice than one that shows sporadic periods of exceptional performance.

By focusing on long-term consistency and relative performance, you can make a more informed assessment of a growth fund's success.

Also read: Growth, of course!

This article was originally published on December 02, 2024.