The Sundaram Mutual ad is giving reasons – ‘Why investors love our dividend policy’….3.

They say to pay dividends, funds must BOOK profits. This is true, but how does the fund house know whether I need the cash today or after 5 months?

Do they know that I am a 23 year old hoping to accumulate money for buying a house when I am 33?

Or do they think I am a 84 year old who needs the dividend so that I can pay the grocer’s bill?

Well they just know that I have opted for the dividend pay out mode. Nothing else matters. Why declare a dividend when the dividend amount is so small? What if I have 300 units? I will get Rs. 1800.

Does this Rs. 1800 offer me anything at all? Very likely that this amount of money will lie idle in my savings account earning a paltry 3% p.a.!

Dividend declaration is a policy decision – and some managers claim it is because they know to time the market. If they really knew how to time the market, and they feel it is currently high (obviously that is why they are declaring the dividend) should they not redeem all the money and wait for the market to come down?

The asset management compensation structure will not allow them to do that, right?

Also unlike a company dividend, this is just my money being distributed to me – so is the amc doing me a favor? no. Not at all.

Just that it makes a lot of sense to keep money in GROWTH OPTION ONLY. Withdraw money as and when you need…NOT WHEN THE FUND MANAGER DECIDES to distribute it.

Withdraw as much as you need, not accept what the manager gives.

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  1. Sundaram mutual fund’s sales strategy is flawed. Mutual fund dividends are not like dividend in shares. They are just returning your own money. When you want your money to work for you and compound, why get it back unnecessarily and untimely.

    Investors are always carried away by mutual fund dividend announcements. They want to make investments before record date so that they can get some money back. Pass back by fund houses!

    Fresh corpus pours in for AMCs and additional business and commission for advisors.

    I’m curious to know if the fresh corpus an AMC receives is more than its dividend outflow. May be Wealthforum or Valueresearch may do some study.

    Even for MIPs, we suggest SWPs.

    Mr.Subra – After Arthur Ashe’s story, I was very impressed by reading Alexander’s story recently in your blog. Though I’ve heard and read it before, I feel the story has timeless appeal. So searched the web and found an interesting version of the story and this is my weekend post.

  2. one more reason for not opting dividend reinvestment option , particularly for elss from my experience: you could not escape from such fund for infinite period even you wish!

  3. I agree with dividend policy.
    A person should opt for dividend option for the same reason he decides to go for mutual funds. Mutual Fund manager know market better. He knows when the market is oversold or overbought.

    About the argument of “should they not redeem all the money and wait for the market to come down?” I think nobody should redeem all the money because market still can go higher. He will miss the opportunity of booking profit at that time.

    Markets can remain irrational a lot longer than you and I can remain solvent. Thats why one should not redeem all the money at one go.

  4. so,what essentially is the difference between a dividend given to an MF unit holder and one given to a shareholder in a company?
    in both cases,it is indeed the money management decides to give back to the “owners”.in the latter case too,the share price implicity prices in the dividend policies of management -which is essentially declaring that they dont see any further opportunities to invest the money (and earn more than the share’s expected earnings yield).
    both are the same ,only difference being that the MFs portrays their payout to be some godsent bonanza.this is a tactic similar to the companies which pretend that stock splits are a great thing.
    but fact remains that both entail returning your own money back to you.

  5. when company declares dividend : ownership of shareholder is not diluted/sold.
    When MF declares dividend : ownership of shareholder (in the companies in which MF invests) is sold.

  6. Well, when I started my MF investments 8 years back even I got badly advised into investing in the Dividend Payout option (not of Sundaram MF though). I didn’t have any need for dividends or regular income. But the advisor told me this was the less-risky option. I started investing in Growth option only in the last 2 years. I don’t have a great corpus to boast off now :-(. I wish I had been given better advice then.

  7. Pravin there is a HUGE difference between a div by a company and div by a mf. In a company it is the company’s decision of how much to give. In case of a mf you opt for the growth option and decide how much to withdraw.

    Of course now with the company’s shares also available in smaller lots, it is possible to do a dividend reinvestment or sell some shares to get some money. When shares become XD the fall is rarely perfect…so there is some arbitrage opportunity there too.

    never opt for a div scheme (it is inefficient even from a tax point of view). Take a growth option and decide how much to withdraw and when to withdraw….

  8. Regarding Tax planning I read this somewhere. Correct me if I am wrong:

    If a MF scheme with NAV of Rs.10 is declaring a dividend of 2., then invest 10000 before ex-div-date. Then u will get 2000 as dividend which is tax free. Then sell these units the next day for 8000(as now the NAV is Rs.8) and show the 2000 deficit as short term capital loss which we can level against some short term capital gains.

    Is this correct???

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