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Why does the NAV go down after the Payout of Dividends

If MFs are only allowed to declare dividends from realised profit then why does the NAV go down after the Payout of Dividend afterglow the payment is being made from profits that have been just realised and not from any deduction from any previous holdings?

Jul 6, 2016 by Devinder Singh Dhaliwal, Patiala  |   Mutual Fund

The profits of the mutual funds are ploughed back into the funds and reflect in NAVs. Therefore, in the growth option the profits get compounded and NAVs are higher than dividend plans as generally dividends are not paid in the growth option.

But as far as dividend options are concerned, the payout is made to the investors from the fund corpus and therefore, post dividend payout, the NAVs go down to the extent of dividend amount declared on per unit basis. Please note, a mutual fund NAV is calculated by dividing the value of the total assets of the fund by the total number of outstanding units. When a fund distributes dividend to its unit holders, the fund corpus declines but the outstanding units remain the same. Therefore, the NAV declines post distribution of dividends.

However, when investors choose to reinvest the dividend amount (by opting for dividend reinvestment option), the unit holders receives additional units in lieu of the dividend amount. But, the NAV still declines by the amount of the dividend declared.

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