A lot of people fancy a lot on dividends given by mutual fund companies. They often ask me, “hey nick, does the mutual fund you’re offering gives dividends?”, with the perception that the history of dividend declaration should be an input in their decision making as to what Mutual Fund Company to invest in. Bad news! Their wrong.
There are two things about mutual fund dividends. It either give you actual LOSSES, or does not have any benefit to you at all!
Let us elaborate this further so you can understand. (Pardon me if things get too technical, you can always ask me through the comment box below for clarification)
Let us first define what are dividends. A dividend is the profit (accumulated profit) of the corporation distributed to its owners – the stockholders. It may be distributed in three forms: cash, property, or stocks of the corporation.
Cash and property dividends are subject to a 10% dividend tax, while stock dividends are not.
Net Asset Value Per Share (NAVPS)
You already know that the NAVPS is the basis of computing the number of shares you can purchase given a particular investment, and the amount redeemable during investment redemption/withdrawal.
Say you have a P10,000 investment at PhilEquity Fund, Inc.. Deducting the entry fee, say 3%, you now have a net investible amount of P9,700. To get the number of shares you’ll be able to purchase, you need to divide the net investible amount of P9,700 with the applicable NAVPS, say P25.00, you get 388 shares. As you see, out of the invested amount of P10,000, you were able to purchase 388 shares of PhilEquity Fund, Inc..
Let us dig deeper. The NAVPS is the Net Book Value per share of a corporation. It is derived by getting all the assets of the company less all liabilities (Total Assets – Total Liabilities) divided by the outstanding shares. The result of the equation is the Net Book Value, or in mutual fund terminology, the Net Asset Value Per Share.
Losses from Cash Dividends
There are two things we have to remember in analyzing the effects of Cash dividends to our mutual fund holdings. These are:
- The formula of NAVPS (as above)
- That cash dividends are subject to 10% dividend tax
Now let’s begin.
When cash dividends are declared, assets of the corporation decreases. Why? Because instead of Â using the funds and invest them to further increase the value of the Mutual Fund, Mutual Fund companies decided to give it to you. Is this really beneficial for you? Let’s see!
Let us compare results from transactions without cash dividends, and with that of with cash dividends.
Our illustration will be using the following assumptions:
Shares owned by Investor: 388 shares
Assets of Mutual Fund Company: 30,000,000
Liabilities of MF Company: 5,000,000
Outstanding Shares: 1,000,000
Cash Dividends Declared: P3.00/share
Did you see the difference? If you’ll further compute, the difference will be attributable to, where else, the 10% dividend tax!
Now the question will be, why do mutual fund companies declare cash dividend, knowing that you’ll end up taking dividend taxes as losses. Here are my 2 cents.
- Assets under management are beyond the Management Company’s ability to successfully manage them. As a result, they end up distributing a portion of it to make the asset-level more comfortable for their management.
- Mutual fund companies know that investors don’t realize the true effects of cash dividends, that they actually rejoice when they receive one. Thus, they give dividends frequently to deceive their investors that they are doing very well.
I am hoping that the latter idea don’t really exist.
This analysis does not discount one advantage I have deduced in this kind of transaction. Cash dividends are good means of getting something from your investment without liquidating your position. Meaning, you were able to receive money, without having to withdraw your funds, in exchange of a percentage of loss though. Nevertheless, since you still have the same number of shares at stake in the Mutual Fund company, you’ll still be able to have that equal chance of making your funds grow further.
But the question is, after receiving the dividends, where will you put the money? Spend it? Hmmm…
If you are one of the people who are too keen on mutual fund companies that gives cash dividends, I hope this article comes to you as an eye-opener. If in case you’ll find things hard to understand, please use the comment box below. I’ll be glad to give light to you.
Incoming search terms:
- powered by SMF first class, powered by SMF pacific science center, powered by SMF cheap air flights business class airfares, Published News Upcoming News Submit a New Story Groups army general rank, powered by SMF of education