Investors often wonder why the net asset values (NAVs) of growth and dividend options of mutual funds are different. Let’s find out why.
There is little to choose between the two in terms of returns
Investors often wonder why the net asset values (NAVs) of growth and dividend options of mutual funds are different. Let’s find out why.
Under the dividend option, income generated by a mutual fund scheme on its investments is distributed to the investor. This dividend is not assured by the mutual fund and is linked closely to the performance of stock/debt markets. The investor can choose to either encash the dividend or reinvest it in the same scheme (through the dividend reinvestment facility).
Under the growth option, the investor does not receive an income. In this case, the NAV already reflects the growth in investments (if any) registered by the mutual fund. If the investor is in need of an income, he can redeem (either completely or partially, depending on his investment objective) his units; the difference in the growth option between the time he bought the mutual fund and redeemed it is effectively his income.
What happens when dividend is declared?
Once a dividend is declared by the mutual fund, the dividend option NAV diminishes to the extent of the dividend declared. The growth option NAV, on the other hand, remains unchanged (for simplicity’s sake, we have ignored the market movement on that particular day). The diminution in the dividend option NAV equals the amount of dividend declared.
As the table shows, both growth and dividend NAVs have appreciated by 20% from the new fund offer period to close at Rs 12. The mutual fund declares 10% dividend after which the dividend NAV declines to Rs 11 (ex-dividend). The growth NAV, on the other hand, remains unchanged at Rs 12.
The difference between the growth and dividend NAVs will equal the dividend declared (i.e. Re 1). However, the difference in both the NAVs will equal the dividend declared only on the day of the dividend declaration. The next day, this difference will vary (from Re 1 in this case) based on the market movement. For instance, let’s assume that markets appreciate by 10% over a 1-month period after the dividend declaration. In that case, the growth option will rise from Rs 12 to Rs 13.2, while the dividend option will rise from Rs 11 to Rs 12.1.
The 10% growth in NAV is based on the value of the portfolio’s investments. Therefore, although the growth NAV seems higher compared to the dividend NAV, both NAVs have appreciated proportionately. The difference between the options is now Rs 1.1 while at the time of the dividend declaration it was Rs 1.
What investors should do
No matter what option the investor chooses, dividend and growth NAVs will appreciate/depreciate based on the market movement. There is no other factor at play here. Which option (growth or dividend) to select is dictated entirely by the investor’s investment objective and income/liquidity constraints.
www.personalfn.com
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
)
){kind=small}
){kind=small}
)
)
)
)
)
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}