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.

Answer:

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:

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:

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

Anand

How to Buy Multiple Mutual Funds from a Single Online Platform?

Actual Question:

What is the best online platform to buy mutual funds? Is it possible to buy multiple mutual funds from a single platform? If yes, how to buy form an online platform?

Answer:

Dear Friend!

Best Online Platform:

It is not possible for me recommend the best online platform for buying mutual funds. In order to do that one should have the personal experience of having used many platforms, which is not practicable. 

In my opinion all major online platforms sponsored by reputed institutions should provide good services. Following platforms I have used and can say are good:

• Kotak Securities - an offshoot of Kotak Mahindra Bank: https://www.kotaksecurities.com/
• India Infoline: https://ttweb.indiainfoline.com/trade/Login.aspx 

Is it possible to buy multiple mutual funds from a single online platform?

The answer is a definite YES.

Please see the following screen picture from Kotak Securities:

How to Buy Mutual Funds Online:

Please note that all the steps described here are as to be followed with Kotak Securities trading account. Other platforms may have different procedures/ steps and screens.

Before you can buy mutual funds online, you should have completed the following prior formalities:

1. Opened an online trading account with a stock broker.
2. Opened an account that keeps the mutual funds in a dematerialised form in a special account which is popularly known as demat account.
3. Your Power of Attorney (POA) in favour of the broker has to be registered with the Registrar and Transfer Agent of all the mutual funds. This your broker will take care of with your consent but the process may take three to four working days. When you are buying for the first time and if you are not so registered, you may see a screen as follows:

Now you are ready for buying mutual funds online. lets start.

Step 1/ Screen 1: Login

Log in to your trading account using the login ID, password and the transactional one-time-password (OTP). Please note that the OTP requirement may not be involved in a few platforms or there may be any other method of verification.

Step 2/ Screen 2: Select "Trade Now"

On the top lefthand side corner choose the option "Trade Now" and you will enter the following step/ screen.

Step 3/ Screen 3: Select "Place Order"

When you click on the option "Place Order" the following menu screen displaying various options like 'Equity', 'Derivatives', 'Mutual Funds' and so on will open.

Step 4/ Screen 4: Select "Purchase"

Please click on the button "Purchase" listed under the main head, 'Mutual Fund'.

Now the following screen listing various mutual fund categories of various funds will open.

Step 4/ Screen 4: Select "Action"

Please note that a menu table with five mutual fund types or categories, with various schemes sponsored by multiple funds are listed under each category. You have a really wide variety of schemes to choose from.

Under each  fund scheme you have following two action choices are in front of you:

1. Buy: This is meant for an one time buying of mutual fund
2. SIP: Option to subscribe to a systematic investment plan (SIP) - once you choose this you are committing to a regular purchase, usually monthly.

What type of mutual fund to choose?

As I have repeated many times before for real long-term wealth creation you should only choose a well diversified, low-cost, equity, index fund.

Suggested Further Reading:

• Types of Mutual Funds
• How to Choose the Right Mutual Fund to Invest?
• How Frequent Changes to Mutual Fund Portfolio Affect Investor Interest?

In conclusion you can indeed invest in multiple mutual fund schemes from a single online platform and we hope you have learnt how to buy from this article.

Thank you,

With Best Regards,

Anand

How to Start Investing in Mutual Funds?

Actual Question:

How do we start investing in mutual funds, and which types of mutual funds are there?

Answer:

Dear Friend!

Even though the easiest way would be to pick the phone and call a mutual fund for doorstep customer service, I would advice you not to do this. The marketing advisor from the fund, most probably knows nothing about investing and only blurt out prerecorded, jargon filled, platitudes about the schemes for which he or she has been given steep targets.

You must first know about what mutual funds really are, what kinds of funds are there and what schemes will suit you.

Since I have answered similar questions many, many times, instead of repeating myself, I will guide you to these previous answers. Please study them carefully:

• How Good are Investment Advisors?
• Definition of Mutual Fund
• Types of Mutual Funds
• How to Choose the Right Mutual Fund to Invest?
• How Frequent Changes to Mutual Fund Portfolio Affect Investor Interest?
• Miracle of Compounding

 I suggest that after carefully studying the above and other related posts, you please choose only a low cost, well diversified, equity mutual fund. Keep the investments intact for a very, very long time.

I once again repeat that please do not go by the advice given by marketing executives of the funds or so called advisors.

Thank you,

With Best Regards,

Anand

Are Small and Mid-Cap Mutual Funds Good for Investment?

Actual Question:

Should I continue investing in Franklin smaller companies and an L&T midcap fund? How are these 2 funds for long-term investment?

I am 22 years old and currently I am investing in these funds through SIP ₹4000 each. And by long term I mean 10–15 years. Also if you can suggest some more funds to add in my portfolio since I can spare an additional ₹3000 SIP.

Answer:

Dear Friend!

I am sorry, I should point out two discrepancies in your present investment strategy:

Investing in small-cap and mid-cap companies.

It seems that you are investing in costly, actively managed mutual funds.

Small and Mid-Cap companies:

One should always invest in companies that are large. Why?

1. In the first place, Large companies have become to that stature because they have some inherent strengths/ advantages.
2. They can attract financial resources, when required, at competitive rates to implement major expansions, technological up-gradations, etc.
3. They have the resilience to recover from major mistake in case they happen to make a few.
4. At times of a market meltdown large and mid sized comapnies bear the maximum brunt. Large companies though affected escape with just bruises.

 In my case, when investing in shares directly, I make sure that the company has a minimum turnover of Rs.10000 crores (US$ 1.5 billion) and a market capitalisation of an equal amount. These companies will typically fall under the mid-cap segment, but are a select few with extremely good fundamentals. But mutual funds’ inclusion criteria are more biased towards considerations like price momentum, sectoral prospects, etc., rather than company fundamentals.

Costly, Actively Managed Funds:

Actively managed funds are funds that undergo frequent changes by buying new stocks and selling existing ones, with an purported aim of maximising returns. However history proves otherwise. The fund management fee charged for active funds ranges between 3–4% per annum. You can imagine the total fees charged by the fund over an investing period of 15 to 20 years!

Investor in mutual funds will benefit by investing in well diversified, low cost index mutual funds or exchange traded funds. The fund management fees for such passive funds are below 0.5% per annum.

Your Particular Situation:

Finally coming to your personal investment situation, I suggest that you stop your existing SIPs and start a SIP of:

• SBI ETF (Exchange Traded Funds) BSE 100
• LIC MF ETF - Nifty 100
• ICICI Prudential CNX 100 iWIN ETF

Please note that I have not recommended the above based on any returns or performance but simply because:

• They are low cost, exchange traded funds.
• The fund are operated by large financial institutions that you can expect to be in business for the next 100 years
• They are composed of the Top 100 Indian companies.

Suggested Further Reading:

• Types of Mutual Funds
• How to Choose the Right Mutual Fund to Invest?
• What is an Exchange Traded Fund?

Thank you,

With Best Regards

Anand