Saturday December 29, 12:05 PM
Dividends are not everything! |
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By Personalfn.com
The last 3-4 months of the financial year are very critical not just for corporates, but also fund houses. The reason is simple. Like most other businesses, employees of fund houses get a year-end bonus. And the quantum of the bonus is closely linked to the net assets of the fund house; so, higher the net assets, higher the annual bonuses.
So you can trust fund houses to employ every trick in the book to garner higher net assets. Declaring dividends is one trick that usually never fails to get investors all excited. Unfortunately, lack of investor awareness and an apathetic attitude by fund houses and mutual fund distributors/agents alike, leads investors into believing that funds with a 'consistent' track record in dividend declaration are the best. Expectedly, nothing could be further from the truth.
Investors need to understand some fundamental facts about dividends before getting all impressed about funds that regularly declare dividends.
To begin with, dividends are declared from the net asset value (NAV), so every time there is a dividend declared, the NAV will decline by a similar amount. So effectively, its money going out from one hand into another. There is no net gain. Mutual fund investors should not confuse dividends on mutual funds with dividends from stocks wherein the stock price remains unaffected after a dividend declaration.
Moreover, a dividend declaration is not necessarily a good sign. It could even mean that the fund manager does not have enough investment opportunities and is therefore returning the money back to investors. In a more somber situation, it may even be a case of the fund manager selling some good stocks only to accommodate the dividend declaration, which in turn is a ploy for garnering assets. While we aren't suggesting that every dividend is declared with an ulterior motive, the possibility of the same cannot be ruled out.
The stock markets closed in positive terrain this week. The BSE Sensex rose by 5.45% and closed at 20,207 points; the S&P CNX Nifty posted a gain of 5.43% and settled at 6,080 points. The CNX Midcap closed at 9,068 points (up by 6.63%).
Weekly top performers: Open-ended equity funds
| Equity Funds |
NAV (Rs) |
1-Wk |
1-Mth |
6-Mth |
1-Yr |
SD |
SR |
| JM HI FI |
18.47 |
11.01% |
17.80% |
64.18% |
66.24% |
9.61% |
0.29% |
| Reliance (RELI.BO, news) Reg. Savings-Equity |
29.73 |
9.55% |
25.85% |
70.74% |
90.87% |
8.46% |
0.51% |
| JM Small and Mid Cap |
17.14 |
8.35% |
17.62% |
58.96% |
- |
- |
- |
| Tata Contra |
17.52 |
8.13% |
18.41% |
44.35% |
52.38% |
8.14% |
0.23% |
| Tata Equity P/E |
45.49 |
7.97% |
12.41% |
48.32% |
80.70% |
8.14% |
0.38% |
(Source: Credence Analytics. NAV data as on December 28, 2007.)
(Standard Deviation highlights the element of risk associated with the fund. Sharpe Ratio is a measure of the returns offered by the fund vis-a-vis those offered by a risk-free instrument)
JM HI FI (11.01%) topped the equity funds segment. Reliance Regular Savings-Equity (9.55%) and JM Small and Mid Cap (8.35%) came in at second and third positions respectively.
Weekly top performers: Long-term debt funds
| Debt Funds |
NAV (Rs) |
1-Wk |
1-Mth |
6-Mth |
1-Yr |
SD |
SR |
| Birla Income Plus |
34.04 |
0.91% |
1.95% |
9.93% |
12.24% |
1.03% |
0.05% |
| ING Income |
19.54 |
0.76% |
1.45% |
5.91% |
8.31% |
0.48% |
-0.19% |
| Birla Gilt RP Plus |
25.54 |
0.73% |
2.22% |
7.64% |
8.98% |
0.88% |
0.10% |
| Birla Sun Life Income |
28.87 |
0.73% |
1.66% |
8.22% |
12.59% |
0.81% |
0.30% |
| Principal Gilt IP |
17.31 |
0.65% |
2.04% |
7.15% |
6.22% |
0.98% |
-0.07% |
(Source: Credence Analytics. NAV data as on December 28, 2007.)
The 10-Yr 8.07% GOI yield closed at 7.86% (December 28, 2007, source: Reserve Bank of India website), 1 basis point below the previous weekly close. Bond yields and prices are inversely related, with falling yields translating into higher bond prices and NAV for debt fund investors.
Schemes from Birla Sun Life Mutual Fund, dominated proceedings in the long-term debt funds segment. Birla Income Plus (0.91%) surfaced as the best performer, followed by ING Income (0.76%). Birla Gilt RP Plus (0.73%) and Birla Sun Life Income (0.73%), jointly held the third position.
Weekly top performers: Balanced funds
| Balanced Funds |
NAV (Rs) |
1-Wk |
1-Mth |
6-Mth |
1-Yr |
SD |
SR |
| Escorts (ESCO.BO, news) Balance |
76.33 |
6.00% |
10.80% |
45.46% |
65.37% |
6.15% |
0.43% |
| LIC MF Balanced |
73.59 |
5.79% |
14.94% |
62.22% |
61.93% |
6.57% |
0.39% |
| ICICI (ICIC.BO, news) Pru. Balanced |
46.82 |
5.21% |
7.36% |
27.75% |
35.87% |
5.12% |
0.35% |
| Magnum Balanced |
33.59 |
5.13% |
8.71% |
19.67% |
30.35% |
6.40% |
0.30% |
| Birla Sun Life 95 |
261.12 |
4.97% |
12.52% |
30.83% |
50.12% |
5.42% |
0.42% |
(Source: Credence Analytics. NAV data as on December 28, 2007.)
Escorts Balance (6.00%) led the pack in the balanced funds segment. LIC MF Balanced (5.79%) and ICICI Prudential Balanced (5.21%) also featured in the top performers' list.
So if dividends are not everything like you were always led to believe by unethical mutual fund agents, then what is? At Personalfn we have always maintained investors need to evaluate mutual funds based on, among other parameters - investment style and approach, long-term track record over various market cycles, particularly the downturns and ethics. And of course, the mutual fund must fit your risk profile. If the mutual fund qualifies on all these parameters, then invest in it by all means, regardless of its track record in declaring dividends.
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