Answer transcript: One should not be investing in equity funds to derive income. The dividend from equity fund is not a bankable source of income. Dividend earning is not the right approach to evaluate a fund. When you choose a fund you should look at the overall return of the fund and not the dividend it gives. In a bad market, a fund might give dividend even when it is losing its value. This will create a false impression to investors that the fund is performing well as it is giving out dividend. In an open-ended equity fund, dividend don't matter. In fact, the value of your investment goes down to the tune of the dividend that you receive. Assuming a fund's NAV is Rs 20 and the fund gives a 20% dividend (on the face value), then the NAV on that day will be Rs 18. This means the dividend is no particular gain. You simply get your money back. Investors should look at a relatively stable/growing portfolio. Take out the gains in the periodicity based on the goals. For example, a good withdrawal percentage will be 5% in a year. Say, for a Rs 12 lakh corpus, the annual withdrawal should not be more than Rs 60000 in a year. This will help the fund grow and protect the capital.
This article was originally published on April 11, 2017.
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