Wise Wealth Advisors

D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Is paying dividends an indication of performance?

Posted by Muthu on December 23, 2010

As per latest wealth creation study by Ramdeo Agrawal, our GDP is expected to multiply by about 4 times in from the current levels in the next 10 years. We may see our GDP at $5 trillion  in 2020.

To appreciate this number, you need to know that it has taken 60 years after independence to achieve $1 trillion GDP. We would be multiplying it by 400% little over a decade.

Now you may understand as to how fast we are growing.

If GDP grows by 400%, it goes without saying that equities are likely to outperform the broader economy.

So please invest in equities for long run. Next few decades is going to be a period of excellent growth and ensure that you profit from this growth.

One way of amusing myself is to look into the advertisements and claims of financial services industry.

A mutual fund house is repeatedly making claims in newspapers time and time again, whenever it declares dividend in its funds, that dividend given is indication of its performance.

Everytime I see such advertisements from this fund house, I ask ‘Is it so?’

There is a general trend among investors to invest in the schemes before the record date of dividends so that they get some ‘income’.

This is one of the investment myths encouraged grossly and subtly by some advisors and fund houses.

Advertisements such as these only lure and strengthen the above behaviour of investors.

This is a good marketing strategy for a fund house to collect more money from the investors.

But whether a dividend from a fund has anything to do with the performance?

The answer is no.

A dividend from a mutual fund is not the same as dividend from a share.

When a mutual fund issues dividend, all it is doing is paying back a part of your capital.

We never advice people to opt for dividend option unless some investors want it that way despite we educating them.

By receiving back a part of your capital, you are denying the opportunity for that money to compound further.

Investments need time and go through various market cycles to get the benefits of compounding.

By withdrawing capital, in the name of dividends issued by a fund, the very purpose of the investing is defeated.

Investments in equities are always for long term, and you withdraw a part or sum only when you need it, usually on reaching your long term goal.

You can withdraw money through redemption when you need it rather than the fund house paying you at its discretion, even when you may not need the money.

Even for people investing in debt oriented plans like MIPs to get regular income, systematic withdrawal plan (SWP) is far superior to dividend option. Please read the page ‘Maximize Monthly Income’ in our portal for more details.

The risk adjusted returns offered by a fund beating its benchmark is the proof of performance and not paying dividends as some fund houses like to claim.

Incidentally I was going through the monthly news letter sent by the same fund house where they have mentioned under ‘Do you know?’ that is there is no entry load for direct investments that are not routed through distributor.

Common gentlemen, you are still living prior to August’09. Currently there is no entry load for any investments whether made directly or through an advisor. The above information is misleading.

Error in my blogs is understandable as I’ve no editor or proof reader but I hope someone in the fund house proof reads and edit the newsletters mailed by it.

The irony is another company related to the ownership of this fund house is also into distribution business and make money by selling funds. Then how they misinform like this?

Not only this fund house, there are other fund houses whose owners are running a distribution business too.

Banks also have fund houses under their ownership or related to them. Banks too run distribution business.

There is nothing wrong in what they are doing.

However I do not know whether such distribution companies and banks would be unbiased in giving advice to their customers instead of trying to push the products of their associate fund house.

There is a scope for potential conflict of interest.

For the markets to grow and the products to penetrate, fund houses should groom more and more individual financial advisors across the country, who would not be biased towards a particular fund house, make a livelihood and grow in the advisory profession.

These fund houses or rather their ownership wants to have it all.

Eating it all only lead to indigestion.

Who other than me who has GERD can say this?

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