Biggest MYTH about Mutual Fund Dividends..!

Biggest MYTH about Mutual Fund Dividends..!

Mutual Fund Investment :

Which Option to Choose Growth or Dividend?

By Mr. B. Padmanaban, CFP^CM

Certified Financial Planner, Chennai

When it comes to mutual fund option, many got confused to take Growth or Dividend?

Let us get into more detail about both the option, so that one can take informed decision.

Investing in a direct stocks or mutual fund is nothing but investing in a business (as low investment as one can).

I strongly believe that none of the business started with the intention to move out in a shorter period.

Business is for generation after generation, though the volatility (Ups & Downs) is the innate nature of any business. In fact, if the business is doing well, will the businessman sell the business fully/partially or she/ he creates more branches to make use of the opportunity!

We always make more, if we align to the objectives. 

In the above statement if business is for long term why we as an investor need to look for shorter gains.

I do agree that some of the investor needs regular income and I will address that also in this.

Biggest MYTH about Mutual Fund Dividends

1. Some of the investor still believes that the dividend is something that they got extra; it is nothing but profit booking, from the fund house side instead of you an investor doing it!

2. There is no fixed rule for giving dividends, it’s purely the fund management decision to give it or / not, why we as investors, are at mercy of AMC, it is our money and we should decide when we need money!

3. Many fund houses have the habit of declaring dividends in a particular period of the year, though the market will have no pattern to behave in a certain fashion on any months.

4. Investors feel that whenever they got dividend, it is like bonus and they can spend as they wish.

Assume you got more dividends in a particular period, and obviously you will tend to spend more than it is required.

5. I have taken examples of 2 mutual funds which are 14 years and 20 years old to demonstrate this difference.
 

Sundaram Select Mid. cap. Mutual fund was launched on July 2002, and if somebody invested Rs. 1 Lakh lump sum in the dividend mode, they got dividend alone Rs. 3.9 Lakhs and the current value is Rs. 3.12 Lakhs (was distributed nearly 15 times with different%).

Instead if she/ he allowed growing without taking dividends it is whopping Rs. 34.15 Lakhs.

In case of Reliance Growth fund invested in Oct 1995, dividend investor got dividend alone Rs. 10.9 Lakhs and the value is Rs. 5.52 Lakhs.

In the growth mode it is Rs. 74.85 Lakhs. All the values are as on 6th May 2016.

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Which is the right option to invest?

Dividend is nothing but getting fruits from the tree. Will any tree bear fruit next month; if it is, then it will be insignificant.

The minimum gestation period is at least 1 year.

1. After 1 year, there is no capital gain or exit load on any of your equity related investments.

Here you can start taking profit after a year at your needs.

2. After 1 year, you can define the quantum of the money if you need a regular cash flow, and also to a specific date.

Here you can decide what do you want, not allow the AMC to decide, how much I can give as dividend!

3. Like I told many a times before, mutual fund is a wealth creation tool and one can use it to his advantage if he stays long!

4. If the fund is generating 16.2% CAGR for the next 20 years then the investment of Rs. 1 Lakh become 20 Lakhs.

At the same time, if the investor decided to book profit year on year (assume it grows consistently 16.2% every year, that's what eventually happen with volatility) she/ he can take Rs. 16,200 every year for the next 20 years to gain Rs. 3.2 Lakhs plus Rs. 1 Lakh principle, where she/he has missed the opportunity to create 20 times!

5. Last, but not the least I read somewhere…

“Amateur book profits and professional cut losses”!

I strongly believe that, by reading this article will behave as a professional when it comes to investing in the coming years.

As an individual we have the assumed responsibility to give more and more to our loved ones, which is easily possible by everyone, is nothing but investing in a mutual fund (only your surplus) and invested over a longer period.

Happy Investing

B. Padmanaban, CFP^CM

Certified Financial Planner

Web Site : www.fortuneplanners.com

98843 49173

Email id padmanaban@fortuneplanners.com

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