How Dividends Affect NAV In Mutual Funds

5 mins read
by Angel One

The net asset value of mutual fund (MF) shares is reduced when dividends are distributed. This does not, however, imply that fund investors have lost money.

The performance of a Mutual Fund’s program is measured by its Net Asset Value (NAV). NAV is the market value of the securities held by the scheme. Mutual Funds put the money they collect from investors into the stock market. Because the market value of assets fluctuates every day, the NAV of a scheme fluctuates as well. The NAV per unit is calculated on any given day by dividing the market value of a fund’s securities by the total number of units in the fund.

Net Asset Value = (Total Assets under Management- Liabilities)/ No. of Units Outstanding.

Assume a mutual fund’s portfolio is worth Rs.10 crores. The fund has Rs 2 crores in costs (liabilities) and around 10 lac units outstanding. The Fund’s NAV is equal to Rs (10cr-2cr) /10lacs = Rs80/-. Unlike stocks, the Mutual Fund’s book value is the same as its NAV.

What does the term “dividend” signify in the context of a mutual fund scheme?

Mutual fund schemes hold securities as part of their portfolios. These securities are churned based on a variety of factors, including price and fundamentals. When a scheme gains money from these transactions, the fund manager may provide dividends to unit holders.

Do all the funds gets Dividend?

Certainly not. The amount of dividends paid out is determined by the scheme’s performance. During a market recession, organizations may choose not to pay a dividend. It’s also worth mentioning that most equity funds offer two options: dividends or growth. Investors who choose the dividend option receive rewards whenever a dividend is declared. The Dividend is reinvested into the fund, and the unit bearer receives extra units in lieu of the Dividend in a growth option. As a result, while the NAV may suffer, the unit bearer will have more units.

What Effect Do Dividends Have on Net Asset Value?

The NAV of a fund decreases as it pays dividends to its shareholders. When seeking to establish how well their investments are functioning, shareholders must keep this in mind.

Rather than receiving fund payouts in cash, a large number of investors choose to have them automatically reinvested. When dividends are reinvested, the shareholder gets more shares or a fraction of an additional stake in place of cash. The NAV decreases by the amount distributed, while the total value of the investor’s fund investment remains unchanged.

Is a low NAV indicative of poor performance?

Not always, to be sure. NAV is determined by a variety of variables, including the scheme’s total AUM. Even if the scheme is performing well, a fund manager may opt to pay out regular dividends, which will lower the NAV.

Before investing in a plan, one should consider the fund’s track record rather than just the NAV. In addition, a plan with a lower NAV means an investor will receive more units than one with a higher NAV. Surprisingly, the Dividend is calculated based on the face value of the units rather than the NAV; therefore, the more the number of units held, the higher the absolute Dividend earned.

Return on Investment

The total return, not the NAV, tells the entire picture about a mutual fund’s performance. Over a particular time period, total return is reported as a percentage of NAV, and it represents both fund dividends and appreciation. These figures sum up a mutual fund’s absolute return on investment.

Growth vs Dividend Reinvestment: Which Is Better?

When the time comes to pick a mutual fund, an investor has many options. The decision between a fund with a growth option with a dividend reinvestment option is one of the more perplexing ones. Each type of fund has pros and disadvantages, and which is a better fit for you as an investor will depend on your specific needs and requirements.

Mutual Funds That Allow You to Reinvest Your Dividends

The option of dividend reinvestment is considerably different. Dividends that would have been paid to fund investors are instead utilized to buy more shares in the fund. When dividends on the fund’s equities are paid out, the investor does not receive cash. Instead, the fund’s administrators utilize funds to automatically purchase new fund units on behalf of the investors and send them to individual investors’ accounts.

This strategy gradually increases the number of shares owned, resulting in a faster increase in account value than if dividends were not reinvested. Many investment firms provide this service for free to their shareholders.

Mutual Funds with a Growth potential

A mutual fund’s growth option indicates that an investor in the fund will not receive any dividends given out by the mutual fund’s holdings. Some shares offer regular dividends, but choosing the growth option allows the mutual fund firm to reinvest the money that would otherwise be paid out as a dividend to the investor. The mutual fund’s net asset value (NAV ) rises as a result of this money.

The growth option is not an intelligent choice for investors who want to get regular cash distributions from their assets. It is, however, a technique to maximize the fund’s NAV and earn a more significant capital gain on the same number of shares purchased when the Mutual Funds are sold.

Dividend Recipients

Dividend distributions by the mutual fund are paid out directly to the shareholder in a dividend payout scenario. Dividends are usually swept straight into a cash account, sent electronically into a bank account. In most circumstances, shareholders do not pay any fees if their dividends are paid in cash, as they do with the dividend reinvestment option.


There is no one perfect mutual fund for every investor, which is why there are so many available. It’s advisable to look into a mutual fund’s specific characteristics before investing, so you don’t end up with a fund that doesn’t meet your precise growth or cash-out requirements.