De-mystifying Mutual Funds

There must be plenty instances when friend of yours must have told you..he got a cool dividend of 100% or 150% on his mutual funds and forces you to move into J mode and you wonder you were such an ass that you never listened to him and invested in the same fund...hang on..think twice, before you invest on any such fund.

100% dividend does not mean that his investments have swollen to twice the size of what he initially invested..look at the following scenario for crystal clarity:

Our dear mote (read as parivesh) invested Rs. 40,000 in HDFC bonds

NAV on Date of purchase = Rs. 40
Number of bonds = 1000 (40, 000/ 40)

After 3 months, when the NAV of fund is Rs.44, the bank declared a dividend of 100%....FYI dividend is always issued on the initial price of MF, which is Rs.10 in 95% of the cases..

Dividend received = 1000 * 10 = Rs. 10, 000

Dividend is non-taxable income, so its not going to impact your annual return..:)

So, how much should be NAV of MF on distribution of dividend.......give it a shot....

It will be Rs.34....remember...dividend is paid out of the NAV of MF...the question which will pop in your mind now will be that its only Rs.4 which you have earned...think again...

Such Mutual Funds are considered as Tax saving funds because of this unique feature..once you receive the dividend you can immediately sell these Mutual Funds and book short term loss on it.....40-34 = Rs 6 per bond...total short term loss of Rs. 6000, this short term loss can be set-off with any short term gains you have..so any people out there who are involved in day trading should always invest in such mutual funds....

So, your total profit will be Rs. 4000 increase in NAV + Rs. 6000 tax saving...which means you almost save a whopping Rs. 24000...awesome na..

let me know..if this helps you in understanding Mutual Funds