Reading mutual funds dividend the right way

Reading mutual funds dividend the right way

Investors should check the dividend yield and should not get carried away by the rate of dividend announced on the face value of the units. Also one should assess if the dividends are sustainable.

Dividends declared by mutual fund schemes typically please a lot of investors, as investors get a good cash inflow. However, this needs special attention especially with respect to equity oriented funds because of the circumstances under which this is paid and the understanding that the investor should take from these declarations. Since the last one year has been a period when the equity markets are doing very well it is important for the investor to take the right lessons from the amount of the dividend that is actually declared. 

Here is a look at the manner in which the dividend has to be analysed. Bumper payout The first thing that a lot of investors realise during good periods in the equity market is that the payout in the form of dividend jumps in equity oriented mutual funds. This is logical due to the fact that earnings in the fund have risen and there is a larger amount of gains available for the fund manager from which the payout can actually be made. The higher payout needs careful attention because investors need to understand the fact that this could be a figure that might not be sustained and needs to be considered in a careful way as compared to a situation where this is a normal payout and which can be expected to continue going forward. Checking details Another step that every investor needs to take with respect to the dividend declaration is to see the figure that has been declared this year in the light of the track record or the history of the fund. A look at the dividend figures for the past 5-6 years will clearly bring out the trend and it will show the investor the position that they are facing. If the fund has been conservative then they would not have raised the dividend this year by much because the better equity market conditions have been considered in the light that these will not continue permanently going ahead. As compared to this a fund that has doubled dividend might look very good this year around but there will be questions as to whether the higher figure can continue going ahead. Looking ahead When it comes to looking ahead the individual investor has to be very careful because they should not use a linear projection and just expect the dividend to go up consistently. 

There has to be an element of realism as the situation for specific years has to be seen in the context of what the fund has been paying out and the kind of return that it has been earning. If this is just due to the short term spike in rates then the likelihood of this continuing in the future remains low and hence one should not get their hopes up too high. Another factor that will play a part in the entire working is the rate at which the fund actually declares dividend. The declaration is on the face value of the fund which is likely to be Rs 10 while the current net asset value could be different depending on the time for which the fund is in operation and the kind of accrual that has been witnessed in the fund over the years. This could mean a higher rate on the face value but it would lead to a lower dividend yield when the current value is considered so this is also a point that would need the attention of the investor.


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