I have invested in some funds that have declared dividends earlier even though they are not dividend plans. However, they are not declaring dividends now even though their NAV is far above Rs 10. Why is this?
Funds pay out dividends from the gains they have made. The dividend has to come from the realised gains and these have to greater than any accumulated losses in the fund. A simple way of finding out if a fund is in a position to pay dividends is to check its NAV.
An NAV above10 shows that a fund is in a position to pay dividends. However, the dividend distribution by a fund is at its discretion.
There is no guarantee or assurance that a fund will pay dividend even if it has a distributable surplus. This seems to be the case with the funds where you have invested.
Be that as it may, the more important point is that you should not worry about dividends in equity funds. The purpose of equity fund investing is growth of capital and this happens irrespective of the fact whether you are in the dividend option or the growth option.
Dividends are not 'extra' gains that you get. When funds pay out dividends, the NAV drops by a corresponding amount. For example, say there is a fund with an NAV of Rs 18.
When it pays a dividend of 20 per cent, its NAV will drop to Rs 16, since it has paid out Rs 2, which is 20 per cent of the face value of each unit.