The net asset value of mutual fund (MF) shares is cut down if dividends are distributed. This by no means implies that fund investors have incurred financial loss.
A Mutual Fund’s performance is tracked by its Net Asset Value (NAV). NAV refers to the market value of the securities the scheme holds. Mutual Funds add the funds they collect from investors into the stock market. Given that the market value of assets keeps fluctuating every day, a scheme’s NAV is also affected. The NAV per unit is calculated daily by dividing the market value of a fund’s securities by the total number of units in the fund. Visit MultiBank Group
Net Asset Value = (Total Assets under Management- Liabilities)/ No. of Units Outstanding.
What does a dividend signify in the context of mutual funds?
Mutual fund schemes have securities in their portfolios. These securities are churned out on the basis of a number of factors inclusive of price and fundamentals. A scheme earns from such transactions while the fund manager offers dividends to unit holders.
Do all the funds get dividends?
That’s a definite no. Dividends paid out are established on the basis of how the scheme performs. When there’s a recession, organizations may not pay a dividend. It must be mentioned that a majority of equity funds offer two options: dividends or growth. Investors who opt for the dividend option get rewards every time a dividend is declared. The dividend is reinvested into the fund as the unit bearer gets extra units for dividends in a growth option. Consequently, the NAV could suffer but the unit bearer may have more units.
Effect of dividend on NAV
The NAV of a fund reduces as the shareholders are paid dividends. When looking to establish the way their investments function, it is necessary that shareholders make a note of this.
Instead of receiving fund payouts in cash, a majority of investors prefer to get them reinvested automatically. As the dividends are reinvested, the shareholder is able to get more shares or a part of an additional stake instead of cash. The NAV reduces by the amount distributed, whereas the overall value of the investor’s fund investment is unaffected.
Does low NAV mean poor performance?
This isn’t always the case. NAV is established with the help of several variables that are inclusive of the scheme’s total AUM. The scheme could be doing well but a fund manager could choose to roll out regular dividends that bring down the NAV.
Prior to investing in a plan, one must take into account the fund’s track record and not just the NAV. Additionally, a plan with a lower NAV implies that an investor gets more units than one with a greater NAV. Know more criptomonedas precios
Growth vs dividend reinvestment: which is better?
When you have to choose a mutual fund, there are several options. The decision between opting for a fund that offers growth option as well as a dividend reinvestment option can be confusing. Every fund type has its own set of pros and cons. What suits you better depends on your requirements.