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Mutual Funds: How payment of dividend reduces your NAV


Mutual fund houses give two options to shareholders: withdraw dividend or reinvest it in the scheme

The withdrawal option is rarely opted as reinvestment makes more sense. But, the withdrawal leads to lower NAV of mutual fund units.


But does that mean losing money? Well, no. Let's understand how.


When a mutual fund distributes dividends, it pays out a portion of its earnings. This reduces the mutual fund's NAV because the fund's assets get reduced by this payment.


The NAV of a mutual fund is the total value of assets minus liabilities divided by the number of units. When dividend is paid, it reduces the total value of assets held.


For example, let's say a mutual fund has a NAV of 10,000 rupees, and it declares a dividend of 50 rupees per unit. If you own 100 units of the fund, you will receive 5,000 rupees. However, the fund's NAV will also fall accordingly.

It's important to note that while a dividend distribution reduces the NAV of a mutual fund, it doesn't necessarily affect the overall value of the investment.

Low NAV simply means that the value of the fund's assets is relatively low compared to the number of shares outstanding.



Click here to know more about dividend distribution.

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