Manish was advised by his mutual fund advisor to invest in a mutual fund that had just announced a dividend of 10%. Accordingly, Manish invested in the fund only to find that the value of the fund had decreased. Manish was shocked with this development as he considered the dividend from the mutual fund same as that of the dividend from the stock.

Manish is not alone. There are many such gullible investors who are taken for a ride by unscrupulous financial advisors. Also sheer ignorance makes people think dividends from mutual funds are the same as the dividends from stocks. But this is not true. Here are the differences between both of them.

When a company declares a dividend, it does so from its income. But when a mutual fund declares a dividend, it does so from the capital appreciation of its NAV. Now the money with the mutual fund is your money as the fund’s job is to collect money from multiple investors and invest in different companies on your behalf. When the share prices of the underlying companies go up, it will push up the NAV of the find, which the fund will then give as a dividend.

The share price of the company is decided by the market and not by the dividend. But in case of a mutual fund, the NAV of the fund decreases by the value of the dividend declared. E.g if the NAV of the fund is Rs. 20 and the fund declares a dividend of Rs 4, the NAV of the fund after the dividend would be Rs. 16.

Also unlike shares, opting for dividend will help in growth of your investment. Hence if you are looking to save for any long-term goal like retirement or children’s education, go for the growth option. So next time your mutual fund broker advises you to invest in a mutual fund just because it is giving a dividend, ignore it.