At the time of paying dividend, a mutual fund scheme pays the amount from the assets it holds

THERE are certain changes in the net asset value (NAV) of a mutual fund that investors find difficult to understand. Some of them have a very simple explanation like a situation, wherein, the NAV under the dividend payout option falls significantly after the record date of declaring dividend has passed. Investors need to understand why this actually happens to be able to decide on the future course of their investments. Here is a detailed look at the situation at the time of dividend declaration.

Overall position:

At the time of paying dividend, a mutual fund scheme pays the amount from the assets that it holds, resulting in a reduction in the available assets. This will impact the net asset value of the fund, as the assets are reduced and the nature of impact is also simple to understand.

Equity funds:

Now, the main question is about the extent of the reduction in NAV of the fund when the dividend is paid. Investors also need to be aware of the difference that they will face, which depends on the nature of the scheme that they have invested into. So, for example, in case of an equity-oriented fund, there is no additional factor at play like the dividend distribution tax at the time of paying dividend. Thus, the change in the NAV will exactly be in proportion to the amount of dividend actually paid out.

One more factor that needs to be understood when it comes to equity funds is that on the date on which the dividend impact is reflected in the NAV, the change in values of assets will also be reflected in the NAV due to the movement in the equity markets.

Debt funds:

To understand the situation for the debt funds is a bit complicated because of the presence of an additional factor in the form of the dividend distribution tax (DDT). This tax has to be paid by the mutual fund at the time of paying dividend. However, the fund does not bear the cost and it is charged to investors indirectly in the form of an adjustment in the NAV of the fund.

When there is a dividend distributed in a debt oriented fund, there are two impacts that need to be seen. On one side, there is the amount of actual dividend, which will be an important factor that determines the amount of adjustment in the NAV. On the other side, the DDT will increase the amount that is actually reduced from the NAV. This could be a major reason why individuals might not be able to exactly match the dividend that has been paid with the change in the NAV of the fund. The overall principle of the reduction remains the same as there is a payout, but what needs to be checked is the extent of the change, as this will be important for investors.