Dividend trap

Mutual fund schemes generally boast about high dividends but mutual fund experts say picking a mutual fund scheme on the basis of its dividend payout may not be the best way to invest in the sector.


Karthik Javeri, a certified financial planner, said comparing the quantum of dividends paid in short term is not the correct way to measure a fund’s performance. “The proportion of dividend depends on a number of factors, including the frequency of payouts over a certain period of time. There are funds that have higher net asset value (NAVs) but lower dividends, while others have lower NAVs, higher dividends,” he said.

Sandeep Sikka, CEO of Reliance Mutual Fund, said the consistency of dividend payout is important than the quantum of dividend.

“Investors should not base their investment decision on the percentage of dividend paid in a short period. They should look for the track record of the fund in this regard over a longer period of time,” he added.

After the recent equity market bull-run, many equity funds have declared dividends up to 70 per cent. So far in October, over a dozen of equity schemes have declared dividends including SBI Magnum Multiplier Plus 93 and Birla Sun Life 95, Birla Sun Life Equity Fund, Reliance Growth Fund, UTI Mastershare, and DWS Investment Opportunity Fund.

Experts believe the quantum of dividend paid does not directly indicate the performance of the fund, especially in the short term.

Unlike equities, if a mutual fund scheme pays certain percentage of dividend, NAV of the scheme drops by the same proportion.

Anil Rego, CEO of Right Horizon, said if investors go for dividend plans, they miss the compounding opportunities over the long-term for short-term gains.

Equity head of a mutual fund said unlike debt funds, where the intention of an investor is to earn dividends on a regular basis, investors in equity funds do not always look for dividend. At times, the focus is more on capital appreciation. “Judging an equity fund on the quantum of dividend payouts is wrong,” he added.

Swati Kulkarni, fund manager, UTI Mastershare Fund, said, “We have paid dividends every year irrespective of the market conditions and consistency is our primary concern not the quantum of dividend.”