Mutual Fund dividend declaration facts

When financial year is about to end, Many mutual funds AMC starts declaring dividends on their tax saving mutual funds or ELSS funds. It’s purely a marketing trend for their ELSS mutual funds. Many Investors apply for such funds without looking at past performance records of funds. Let me explain that you are getting your own money in the name of mutual fund dividends.

Example: Let's us assume mutual fund house (AMC) announces dividend of Rs 5(Earlier they declared percentage of face value like 50% dividend) on their ELSS fund A with effective date of 10th JAN 2011.

Today on 9th JAN 2011 NAV of Fund is = Rs 20.

You apply for Rs 1000 in Fund on 9th JAN 2011 then you will get 50 units (50*20=1000).So your asset value is Rs 1000.

On Effective date of dividend declaration means 10th JAN 2011, Fund A NAV will be deducted by Rs 5 means NAV will become Rs 15.

•  You will get dividend amount of  Rs 250 (50*5 =250) today
•  your asset value(Fund value) will be Rs 750(50*15=750)

So, some amount based on declared dividend will be deducted from your asset value and it will be given to you back. It's not that company is sharing their profit with investors. Stock dividend is pure profit sharing with investors while mutual fund dividend is your own money.

This dividend amount will be generally small amount and will be little difficult to mange and check mutual fund performance.

  

Many AMC declares mutual fund dividends between December to March to attract large number of the investors who are in hurry to manage tax saving investments to save tax. 

Only benefit of dividend: This dividend amount is 100% tax free now.  

Summary: Just check past performance of mutual fund and take your decision l whether to apply for such mutual fund schemes. Start your tax saving investment from April and finish by December.