As on date, which are the good mutual fund schemes with a dividend option and what is the minimum investment to be done in them?
- Ratnakar
Actually this is a bad way to choose a mutual fund scheme, because the dividend option in a mutual fund scheme doesn't mean much. When you buy a share and it gives you a dividend, the company of which you hold the share actually pays you the money. This may not reflect in the stock price being adjusted precisely by the quantum of dividend amount paid.
But in case of a mutual fund, the dividend paid is very much visible arithmetically in the adjusted NAV. For example, suppose you have invested Rs 10,000 in it when its NAV was Rs 10, which has now become Rs 15, making your investment worth Rs 15,000. Now, if the fund decides to give you Rs 2,000 as dividend, then you will get the dividend in your bank account and the worth of your investment will get reduced to Rs 13,000 that very moment.
So you can see how the arithmetic of dividend works. The dividend is paid entirely out of your own investment. People have this impression that the quantum of dividend coming in is the result of the fund's performance, which is not true. Your invested money gets reduced after paying out the dividend.
So choose a fund appropriately based on its character. Ask yourself questions such as - do you want a relatively stable fund? Or do you need regular income from your fund? Thus your fund selection should be decided by your temperament with respect to the turbulence (or volatility) of the fund. Don't start your fund selection based on dividend.
This article was originally published on May 26, 2021.
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