Saturday, May 20, 2017

Why the Net Assets Value (NAV) of Mutual Fund Units Falls After Dividend?

Actual Question:

Why does MF NAV drop after paying dividend?
I assume dividend paid by MF is the dividend paid by stock-companies.


Dear Friend!

Your question has two parts as follows:
  1. Why the NAV drops after paying Dividend?
  2. Is the dividend paid by the mutual fund is the same as paid by the companies in whose stocks the mutual fund invested the money.

Let's examine them one by one.

Why NAV of Mutual Funds Falls after paying Dividends:

Till the time the dividend is paid the value of the dividend gets accumulated and reflected in the NAV and once the dividend is paid out, naturally the NAV comes down. Please see the example below:

Table showing the decrease in value of NAV after dividend

In the case of stocks also the same things happen. The price of the share falls after the record date fixed for dividends. Then people popularly term the phenomenon as the stock has become ex-dividend.

Is the dividend paid by the mutual fund is the same as paid by the companies?

Under normal circumstance this should be the case, which is the prudent, conservative and correct policy. However, it is not uncommon for mutual funds to pay more dividends than actually earned, by dipping into the capital sum invested. This is obviously to please/ impress the investors that the fund had earned and paid handsome dividend, when it is not actually the case. Please see the following example:

table showing how dividend paid from capital by mutual funds

In conclusion, when dividend is paid, cash accompanied by value is lost and therefore the NAV of the mutual fund unit drops. Many a time funds pay dividends out of capital which is very objectionable practice.

Thank you,

With Best Regards