The Orange Paper » Mutual Funds

Investing in Mutual Funds – Dividend or Growth Option?

Austin — Sun, 18 Apr 2010 09:57:40 +0000

In most mutual funds schemes an investor can choose what s/he wants to do with the profit made on his investments — get it in hand (I mean bank account) or plough it back into the mutual fund scheme. Just a few days ago I was asked this question by a friend — which option should one pick while investing in a mutual fund — Growth or Dividend?

The answer — this post, explaining the difference that should be of benefit to all.

PROFITS

The basic difference is in the way the returns on investments are treated. In a growth option, any profit made on investment is not distributed but retained in the scheme. In a dividend option, the investor gets back the return as dividend.

NET ASSET VALUE (NAV)

In the dividend option, the value of the scheme’s assets fall once dividend is paid out. Hence, the scheme’s NAV is usually lower in the dividend option compared to the growth option.

TAX TREATMENT

The tax treatment is different for the two options. Dividend from an equity fund is tax free, but dividend from a debt fund is subject to dividend distribution tax (DDT) in the hands of the MF at 14.2%, including surcharge and cess. This tax is paid out of the dividend earned.

Photo by: Noël Zia Lee

This is a post from: The Orange Paper ~ A blog about Personal Finance, Indian Stock Market, Financial Planning, Investing, Wealth Building, Taxes and more.

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Save entry load on SIPs

Austin — Sun, 16 Aug 2009 01:50:30 +0000

Beginning August 1, 2009, the Securities and Exchange Board of India (Sebi) has said, there will be no entry load for any mutual fund scheme and the upfront commission to distributors will be paid directly by the investor.

Did you know you could be still paying an entry load even after Aug 1, 2009?

Here’s how — if you started investing via systematic investment planning (SIP) before Aug 1, 2009 then you will be paying the entry load on each SIP amount every month even AFTER Aug 1, 2009 till the term end of your SIP. Most funds deduct an entry load of 2.25% on each SIP installment.

Now, no one told you about this, right? Hmm, well there’s a way to handle this to ensure that you could still continue with SIPs but do away with the entry load.

You simply could stop your existing SIPs and start fresh ones so they can figure in the “registered on or after August 1, 2009″ category.

However, have a word of caution here — Look at what are the conditions and clause before stopping the SIP — whether there is load for withdrawing or minimum number of SIPs to be invested.

9 tips on how to select a fund

Austin — Sat, 06 Jun 2009 19:10:26 +0000

photo by seven_null7

1. Don’t just blindly buy what the financial advisor sells you. See if the stocks the suggested fund invests in are relevant and missing from your portfolio.

2. When a scheme’s return have run up too fast, it’s time to exit and not enter a scheme.

3. You don’t have to invest in a hot-selling fund just because a colleague is investing in it. Maybe it’s too hot to handle.

4. Evaluate your portfolio once a year and see if alterations are needed. At the same time, don’t exit the very instance the fund delivers a negative return. Give the investment some time to grow.

5. When a scheme is being merged into another, evaluate whether the new scheme is worth moving into. You may or may not be comfortable with the altered investment objectives. Compare their expense ratios.

6. The risk in equity diversified schemes is lower than that in sector specfic schemes such as telecom, pharma, infrastructure, automobiles etc. If you are a first time investor, it is always easier to start with an equity diversified fund, which spreads investments across all sectors.

7. If you are planning to invest in a scheme, a variant of which you alreay have parked your money in with a seperate fund house, see if there are any other values the fund or its manager provides for having the same kind of fund in your portfolio.

8. When the index levels are down, like they were a few months ago, index funds, where your money grows as the index values move higher, may be a good option.

9. Think of the liquidity. Ask if you can exit the investment in case of an emergency without incurring higher costs.

Stop Paying Entry Load, Go Direct

Austin — Sat, 04 Oct 2008 10:15:02 +0000

photo by coloros

In January 2008 SEBI abolished entry load on Indian equity funds if you’re investing directly. However, it is mandatory to pay an entry load of 2.25 percent if you transact through intermediaries, better known as distributors who take this charge to service investors.

Suppose you are investing Rs 1000 and the NAV (net asset value) of the scheme that you are buying is Rs 10. This NAV is multiplied by 1.0225 (2.25 percent of Rs 10) to factor in the entry load and operative NAV for you becomes Rs 10.225 (Rs 10 as the actual NAV and Rs 0.225 as the entry load).

This takes the number of units allocated to you to 97.79 and the money invested is Rs 977.50 instead of Rs 1000. The remainder Rs 22.50 (1000 less 977.50) goes to the distributor and to meet other administrative expenses incurred by the mutual fund company. However, if you invest directly through that mutual fund company’s website then the whole Rs 1000 is invested and you hold 100 units.

While you lose this money upfront, this charge literally multiplies. For example, even on a conservative basis, Indian equities can double in the 5 years. Since 2.25 percent has been deducted upfront and not been invested, what you have lost is 4.5 percent (double of 2.25 percent) from your returns.

Consequently, it is a simple decision that you should invest directly and not pay this significant charge. If you can choose your fund on your own and want to save on entry load you have these options:

a. Visit the AMC/CAMS/ Karvy investor centre, fill the transaction form, and also fill the KYC (know your client) form [if you’re investing Rs. 50000 or more].

b. You could even download the transaction form, print it, fill it and mail (post) it along with your cheque/demand draft to the Mutual Fund’s Investor Centre. You’ll also need to attach a photocopy of your PAN card (must be attested).

c. Invest online through the mutual fund’s website.

I personally prefer Option C because it gives me the freedom to invest in mutual funds whenever I wish. Investing online also saves me time — if I were to go to the Mutual Funds office I’d spend minium 60 minutes getting there.

I wanted to invest in one of Fidelity’s mutual funds so this time I chose to do it online.

To begin with, I visited Fidelity’s website to find out the procedure for investing online through their website. Found out that I should have an online account with them to be able to invest online. So, I filled out an online registration form and at the end of the registration process they email you a copy of the Registration Form (pdf) which is pre-filled with data you entered in the online registration form. You (or anyone you can send) need to either visit the Mutual Fund’s office (Investor Centre) to submit your form or you could mail it to them.

I had a meeting on Friday and Fidelity’s office is just a 5 minute walk from that place so I carried along my user registration form and related documents to submit it — hoping the process would be completed in a day or two and will be getting my online account ready to use I was told it takes around 15 days to get the online account setup process to be completed. How sad!

As I was there and did not want to wait for another 15 days to make my investment I picked up a transaction form, filled in and along with the cheque made my submission over the counter. It hardly took 5 minutes to complete the process but the sad part was — the time — it was 15:10 hrs which meant I could not get Friday’s closing NAV (cut off time is 15:00 hrs). Now my transaction form will be processed on Monday’s closing NAV.

Anyways, I look forward to receiving my Fidelity online account details in about 2 weeks.

For your convenience, listed below are website links of those mutual funds who are able to offer online investing to their customers.

Birla Sun Life Mutual Fund
CAMS Online Transaction Service
Fidelity Mutual Fund
Franklin Templeton Mutual Fund
HDFC Mutual Fund
ICICI Pru Mutual Fund
Karvy Online Services
Kotak Mutual Fund
Mirae Asset Global Investment Mgmt (India) Pvt. Ltd.
Principal Mutual Fund
Quantum Asset Mgmt Co. Pvt. Ltd.
Reliance Mutual Fund
SBI Mutual Fund
UTI Mutual Fund