Posted On Friday, Jul 09, 2010
A few investors have asked us why we don’t declare a dividend. “Your NAV has nearly doubled since launch,” they say with praise, then they question, “But where is our dividend?”
By definition, dividends are transfers of a portion of profit earned by the company to its shareholders/investors.
The company can choose to do either of the following with its profit earnings:
1. Plow it back into the company to fund growth;
2. Use it to repurchase its own shares, increasing the value of each share still on; the market. (Making the slice of the pie a larger one);
3. Issue bonus shares out of this profit to investors;
4. Distribute these profits to investors as dividends;
Let's focus on the last option, paying dividends (or not).
Well, there is a problem with declaring a dividend: what if you don’t need the money, or need more of it, or need less of it?
A mutual fund gives one dividend to all its investors, it cannot give you a tailor made payout for exactly the amount of money you need. So, giving a dividend may not solve your problem.
For example, what if you need Rs 10,000 for your monthly expenditures and Quantum Long Term Equity Fund (QLTEF) was your only mutual fund investment? Let’s assume that the total dividend paid by QLTEF to you was Rs 7,000, this means you would still need to figure out how to get the balance Rs 3,000 from other sources.
But what if you needed Rs 10,000 and you get Rs 15,000 as dividends? What would you end up doing with the surplus Rs 5,000? Chances are that you would spend it on something that you didn’t really need. Or you would face the problem of re-investment risk – not knowing what to do with it. You may place it back in Quantum Long Term Equity Fund – in which case there was a transaction and administration cost that you incurred in getting it and re-investing it! Or you may do something silly with it – something that you would never have considered if it was still “stuck” in QLTEF.
And, finally, under a third scenario what if you don’t need any money every month, (or with any known regularity) and QLTEF issues you a dividend? What do you do then? Again, you would spend it or face the risk of re-investing this “surplus”!
Yes, this is why we don’t like the concept of paying dividends; we leave that decision to you.
Another fact is that, for regular dividends to be paid out, a certain number of holdings must be sold off in order to raise the money. Now this sell off might not be at the most appropriate timing, or rather might not be when the valuations for the stocks were at their optimum levels – thus losing out on a better opportunity.
But that does not stop you from paying a dividend to yourself for any amount that you wish, whenever you wish.
You have a family occasion coming up and need money, don’t depend on your mutual fund to pay out your dividend; redeem as many units as would provide you the required amount and effectively pay yourself a handsome “dividend”.
The question you need to ask yourself here is – Would you rather invest in a fund that pays out dividend and dilutes your NAV or would you rather let the fund manage its NAV that in turn increases the value of your overall investment, and pay yourself a dividend whenever you require one?
Yes, we have not paid out dividends since our Inception in March, 2006, but, (hopefully), we do know how to manage your money, and manage it well – our NAV has nearly doubled, and our expense ratios have moved down – ensuring you of even better returns.
See what Value Research’s magazine - Mutual Fund Insights - had to say about Quantum Long Term Equity Fund.
A Systematic Withdrawal Plan is a more convenient way to receive a regular stream of payouts in a defined frequency. This facility allows you to redeem specified amounts from your fund at a pre-defined frequency. You can choose to regularly withdraw either a fixed sum or even just the appreciation on your investment, which will not disturb your capital contribution.
Here’s a thought, companies that pay dividends are not necessarily the most efficient investors of the capital entrusted to them. By giving the investor a dividend they may be effectively saying, "Take the money because you probably know what to do with it and we have no use of your money."
And, that is something you are not likely to hear from Quantum Mutual Fund.
We will simply focus on investing your savings in a sensible way, focusing on the long term and on the need to identify and minimise risks that we take to give you a chance to earn long term returns.
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