The performance of a dividend-paying fund can be judged from its dividends over the years. But how does one assess the performance of a growth fund which does not pay dividends?
- Padam Dev
First of all, I would like to point out that dividend and growth are not two different types of funds. They are two variants of the same mutual fund scheme. Most mutual funds provide both dividend and growth plans. The underlying portfolio is also the same. The difference is just that the growth plan does not provide any intermittent dividends and the returns accrue to you in the form of appreciation in the NAV. You get it all when you redeem your investment.
In the case of the dividend plan, the fund may keep coming out with a dividend every now and then, so a part of your gains is redeemed and paid back to you by way of dividends. Also, a consistent track record of paying dividends is no yardstick for a fund's performance. It is very much possible that a fund which has a consistent track record of paying dividends may actually be an underperformer in its category. So I would say that be it a dividend plan or a growth plan, to assess the performance of the fund, one should compare its long-term returns with that of its benchmark as well as its other peers in the category.
For instance, an investor should look at the returns vs the benchmark vs the category over longer time frames of say, three years, five years, seven years or even more. And the idea is that one should not look at these returns only at one point in time or the returns that are there currently, but one should also look at how these returns were last year or one year before. This is technically known as rolling returns. So one should look at these metrics to be able to assess how consistently a fund has delivered.
The other important thing is that you should not always chase the top performer. As long as the fund has delivered above-average returns fairly consistently over long terms, that should be considered good enough.
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