Your money: Keep NAV intact
The tax-savings season is on and predictably quite a few equity linked savings schemes (ELSS) have started announcing dividends to lure investors. It's that time of the year when ELSS or tax-saver mutual funds (MFs) come up with payouts to attract inflows from those who do their tax-related investments at the last minute.
While ELSS dividends offer liquidity for those committing sizeable funds to axe the tax during the fag end of fiscal year, investors should choose growth option for long-term wealth creation, say experts. The growth option outperforms the dividend scheme over long-term, data shows.
For instance, investments made under the growth scheme of a leading tax-saver MF during 2007-08 had grown 77.6% by the end of 2010. But the dividend option managed only 39.2% growth (including dividends paid ) in the same period. Some funds with dividend option managed only a meagre growth and a few have even given negative returns in three years (after adjusting all the dividends paid in the last three years).
Investment in growth option would have been beneficial in all years except 2001-02 and 2008-09 in the past 12 years, says Surajit Misra, national head, MFs, Bajaj Capital, a distribution platform for funds. The continuity of investment has a good effect but in the dividend option the gains are frittered away (in the form of payouts), he says.
Growth option is always better over the long-term because of the compounding effect, says Rupesh Nagda, head, investments, Alchemy Capital Management , a wealth management firm. However, dividends are a big draw among retail investors who invest in tax-saving funds that come with a three-year lock-in period.
An investor committing a large sum (say Rs 1 lakh under Sec 80 C) besides saving tax would be able to get back a ! lot of m oney through dividends if the payout is large. Dividends have a soft benefit. They create some extra liquidity. A lot of people need money by March and dividends are a good way of generating cash, say experts.
While dividend from equity MF sis tax free, several investors don't know that the net asset value (NAV) of a fund drops when a payout is made, say observers. A 10% dividend on the face value of Rs10of a fund would result in the NAV dropping by Re 1 per unit.
Some funds had come up with unusually high dividend payouts (more than 850% in three years) just to get more inflows into their schemes. With Sebi stipulating that dividends can be paid only from profits and not from the investors' money (which was done earlier in quite a few instances )to clamp down on this practice , the quantum and the frequency of payouts could come down, say observers.
While ELSS dividends offer liquidity for those committing sizeable funds to axe the tax during the fag end of fiscal year, investors should choose growth option for long-term wealth creation, say experts. The growth option outperforms the dividend scheme over long-term, data shows.
For instance, investments made under the growth scheme of a leading tax-saver MF during 2007-08 had grown 77.6% by the end of 2010. But the dividend option managed only 39.2% growth (including dividends paid ) in the same period. Some funds with dividend option managed only a meagre growth and a few have even given negative returns in three years (after adjusting all the dividends paid in the last three years).
Investment in growth option would have been beneficial in all years except 2001-02 and 2008-09 in the past 12 years, says Surajit Misra, national head, MFs, Bajaj Capital, a distribution platform for funds. The continuity of investment has a good effect but in the dividend option the gains are frittered away (in the form of payouts), he says.
Growth option is always better over the long-term because of the compounding effect, says Rupesh Nagda, head, investments, Alchemy Capital Management , a wealth management firm. However, dividends are a big draw among retail investors who invest in tax-saving funds that come with a three-year lock-in period.
An investor committing a large sum (say Rs 1 lakh under Sec 80 C) besides saving tax would be able to get back a ! lot of m oney through dividends if the payout is large. Dividends have a soft benefit. They create some extra liquidity. A lot of people need money by March and dividends are a good way of generating cash, say experts.
While dividend from equity MF sis tax free, several investors don't know that the net asset value (NAV) of a fund drops when a payout is made, say observers. A 10% dividend on the face value of Rs10of a fund would result in the NAV dropping by Re 1 per unit.
Some funds had come up with unusually high dividend payouts (more than 850% in three years) just to get more inflows into their schemes. With Sebi stipulating that dividends can be paid only from profits and not from the investors' money (which was done earlier in quite a few instances )to clamp down on this practice , the quantum and the frequency of payouts could come down, say observers.
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