Mutual Fund Dividends

Dividends seem to have become a major theme in the marketing of mutual funds nowadays. Evidently, many investors have an inadequate appreciation of the fact that dividends are meaningless as indicators of fund performance-the money that is given to you as dividends is simply deducted from your account with the fund. Let's look at an example. We make an investment of Rs 2000 at an NAV of Rs 20 per unit, getting us a 100 units of a fund. The fund then gains 20 per cent, bringing its NAV to Rs 24 and thus our investment is worth Rs 2400 (Rs 24 X 100 units). Now, the fund declares a dividend of 50 per cent, thus paying us Rs 500 (dividends are always a percentage of the face value). Now, the NAV will go down to Rs 19 and thus the value of our holdings will g

This article was originally published on February 16, 2004.