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Does Mutual Fund Monthly Dividend Option gives LESS Dividend and has LESS NAV

Based on the data provided in the Reliance AMC Factsheet-October-2015.pdf If I have 1000 units invested in Reliance Arbitrage Advantage fund - Monthly Dividend Option from Aug 2014 to Sept 2015, I get a dividend of Rs. 740 and the NAV as on 30 Sept 2015 is Rs. 10.4777. If I have 1000 units invested in Reliance Arbitrage Advantage fund - Dividend Option from Aug 2014 to Sept 2015, I get a dividend of Rs. 950 and the NAV as on 30 Sept 2015 is Rs. 11.7813. We all know that in Mutual funds if MORE Dividend is declared then the NAV drops to a greater extent as a long term investor in Reliance Mutual fund schemes. I need help to understand WHY is the investor getting more DIVIDEND and more NAV in the Dividend option as compared to the Monthly Dividend option of the same fund. Is it ONLY because of the Power of Compounding? Is Reliance AMC applying a EXTRA CHARGE on the investors who subscribe to the Monthly Dividend option as compared to the Dividend option?

Nov 18, 2015 by Khushroo Satarawala, Mumbai  |   Mutual Fund

Please note that Reliance Mutual Fund or for that matter any AMC does NOT charge EXTRA EXPENSES to investors subscribing to different options. Let us now try to understand why the dividend amounts are different in the dividend option and monthly dividend option. Power of compounding definitely has a role to play but it does not explain the difference. You should note there are three reasons that explains the difference.

  1. As an investor, you should try to think in terms of your investment amount is Rupees. Number of units purchased depends on the NAVs and is of less importance. The NAV of Reliance Arbitrage Advantage Fund – Dividend Option on August 1, 2014 was 11.65. To buy 1000 units of the scheme in dividend option, you would have had to invest Rs 11,650. The NAV of Reliance Arbitrage Advantage Fund – Monthly Dividend Option on August 1, 2014 was 10.27. To buy 1000 units of the scheme in monthly dividend option, you would have had to invest Rs 10,270. Since you invested Rs 1,380 more to buy 1000 units of Reliance Arbitrage Advantage Fund – Dividend Option compared the Monthly Dividend Option, is it not logical that you should get a higher income also. Now if instead of investing Rs 10,270 in Reliance Arbitrage Advantage Fund – Monthly Dividend Option, you had invested Rs 11,650 in the scheme, you could have bought 1134 units and your dividends would have been higher.

  2. As an investor you should look at total returns. Total returns is defined as the dividends plus the increase in value of your units. If you had bought 1000 units of Reliance Arbitrage Advantage Fund – Dividend Option on August 1, 2014 at a cost of Rs 11,650 the value of the units on September 30, 2015 would be around Rs 11,800 (September 30 2015 NAV was 11.8). If you had invested Rs 11,650 in the Monthly Dividend Option on August 1, 2014 the value of the units on September 30, 2015 would be around Rs 11,850 (September 30 2015 NAV was 10.45). So your capital gains would Rs 50 higher in the Monthly Dividend Option.

  3. Finally as rightly guessed by you, there is also the effect of power of compounding. In the monthly dividend option you are taking the profits every month as dividends, whereas in the dividend option the profits remain invested till the time dividend is paid out. Naturally the total returns of dividend option will be slightly higher than that of monthly dividend option. But the impact of power of compounding is quite small.
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