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How does the dividend impacts the Net Asset Value (NAV) of a Mutual Fund?

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Fund Houses offer Mutual Fund to investors with two options:  

  1. Growth -  There is no payout from the fund, hence there is no effect on the NAV.
  2. Dividend - There are periodic payouts at fund houses’ discretion. In this option, NAV is declined to the extent of dividend paid.

For example, Let's say NAV of dividend plan and an equity fund’s growth plan is at Rs.100. If at the end of the year, the dividend plan declares a dividend of Rs.2 per unit, post this dividend declaration, the NAV of the growth plan will remain at Rs.100 but the NAV of the dividend plan reduces to Rs.98 as Rs.2 is paid out as dividends.  

In order to give more clarity to investors, From 01-April-2021, SEBI has redefined the dividend option using a new term called Income Distribution cum Capital Withdrawal (IDCW) as,

  1. Payout of IDCW - Payout is received in the investor's bank account.
  2. Reinvestment of IDCW - Payout is reinvested in the same scheme and payout equivalent no of units are allocated to the investor.
  3. Transfer of IDCW - Payout is transferred into another scheme (i.e. Debt MF to Equity MF).

However, in all the 3 available dividend options, NAV of the MF is declined to the extent of dividend paid. 

The NAV is the price of each unit of a mutual fund scheme. It reflects the total value of the underlying securities. If such securities are sold in order to book profit and distribute dividend to the unit holders, then the NAV would be proportionately affected. Hence, after every dividend announcement, there is a fall in the NAV to reflect the payouts.