Mutual fund dividend clarification ( Does the value of investment decreases after dividend payout)

Personal finance
1

Hope you are doing good fellow, see if you can help me understanding this information as I am new to this type of investments.

Created my demat account in the beginning of this month, invested 2k in equity [holding BILENERGY (279 shares at Rs 5.10) & BGIL (115 shares at Rs 4.23) ] after doing some intraday sessions in penny stocks to experience trading.

May month onward I pledge to add new investment of Rs 5000 every month but don’t want to put all of them in equity only.

So I started to look for some MF options and learned about yielding dividends from funds on daily, monthly, quarterly or yearly basis.

While researching I came across this post, it make me feel confused.

divi

Why dividend option is the worst way to get mutual fund returns Read more at: //economictimes.indiatimes.com/articleshow/64708783.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

My Confusion

Let say I purchase 1000 unit of fund at NAV Rs 20. My Total investment will be INR 20,000.Now, the fund house announces 5% dividend per unit(Hypothetical NAV still at Rs 20) . So I will be credit with Rs 1000 against 1000 unit (actually less because of tax deductions depending on fund type).

According to post author of economictimes my total investment will become 19000. Here I am confused that how it will show in my coin app dashboard that my investment has been reduced and P&L ?

My Question
I can still understand that my investment is reduced as I am generating profit or got money back over time.

But what about units, will it be reduced by 5% as well after receiving dividend. Purchased 1000 will be reduced to 950 units ? (then it is entirely loss)

But if the number of units remain same then it will be good. Because after some time( couple of years) I might have yielded good dividends maybe Rs 5000 in total and the NAV is still around Rs 19/20 at present.

Not loosing much, Right?

Thanks in advance for looking. :slight_smile:

2

Units will remain the same but NAV will be reduced, also why anyone want to opt for dividend plans as it will be taxed before reaching you ? go for growth and sell few if you want, for regular income one can study about SWP (systematic withdrawal plan) instead.

3

No, your units will not reduce. NAV of the units will however decline.

Regardless of the above, it is never a good idea to opt for dividend schemes - they are tax inefficient (due to the policies described in the screenshot published by you). It makes a lot more sense to opt for growth schemes and sell/buy, as required.

4

Thanks so much for clarification @noid and @siva :slightly_smiling_face:

5

As others mentioned, your units will stay the same & NAV will reduce. I recently wrote an article on Everything you need to know about MF Dividends& Dividend Plans. It has relevant & recent info from May 2019, and broad topics/points are:

  • Basics of Mutual Fund Dividends
  • Dividend Plans do not equate to Dividend Strategies
  • Dividend Impact on NAV
  • Difference with Stock Dividends
  • Double Taxation

Hope this helps, shout out if you guys have feedback or more questions! Happy investing! :slight_smile: