Dividends paid by a mutual fund can affect its net asset value (NAV) in a couple of ways.
If a mutual fund pays dividends
If a mutual fund pays dividends, it will reduce the fund’s NAV. This is because the fund’s assets will be reduced by the amount of dividends paid to shareholders. For example, if a mutual fund has an NAV of ₹10 per share and pays dividends of ₹0.50 per share, the fund’s NAV will drop to ₹9.50 per share.
If a mutual fund distributes capital gains
If a mutual fund distributes capital gains in the form of dividends, it will also reduce the fund’s NAV. This is because the distribution of capital gains represents a reduction in the fund’s assets.
It is important to note that the impact of dividends on a mutual fund’s NAV will depend on the specific terms of the fund, such as its dividend policy and the types of investments held in the fund.
Some mutual funds may pay dividends on a regular basis, while others may only pay dividends occasionally or not at all. In general, mutual funds that pay dividends tend to have a lower NAV compared to those that do not pay dividends, all else being equal.
Note
It is also worth noting that the payment of dividends by a mutual fund does not necessarily indicate a poor performance by the fund. Some mutual funds may pay dividends as a way to return profits to shareholders, even if the fund’s overall performance has been negative.
Conversely, a mutual fund that does not pay dividends may have had strong performance, but may choose to reinvest its profits rather than distributing them to shareholders.
Conclusion
Overall, it is important to consider both the impact of dividends on a mutual fund’s NAV as well as the fund’s overall performance and investment strategy when deciding whether to invest in a particular mutual fund.