Mutual funds and investor benefits


The investor can get the optimum returns investing through established and well known mutual funds like Franklin Templeton, Birla, Reliance, Stanley Morgan etc., These companies have expert Financial analysts who can switchover the funds between different options and also at appropriate time. The investor must be prepared to wait at least for 3 years or more to get higher returns. The investments are not for short term of weeks or months. In this article we are giving some basics to understand how mutual funds benefit investors.

Companies declare dividend to pay out cash. The dividend paid out by a company depends on its performance and the amount of cash it does not need for its business activities. In other words, surplus cash is paid out to the shareholders

What is dividend and market price of a share?

Corporate companies declare dividends as a percentage of the face value of their shares. If the face value is say $1.0 and dividend declared is 40% then the dividend the share holder gets is $0.4 or 40 cents. In India the face value of a share is Rs.10 or Rs.2 or Re.1. Usually dividends received per share are very much lower as compared to the stock market value of the share. In 2004-05 a multinational company of India called Larsen & Toubro Limited has declared the highest dividend of 1375%. It has a face value of Rs.2/-.The dividend amount paid was only Rs.27.5 per share whereas the market price of the share at the time of declaring dividend was Rs.2700/-. Dividend yield of a company changes on daily basis with changes in the market price of the share.

Dividend yields

The term dividend yield is an arithmetic calculation. This is the dividend received during a particular year divided by the company’s market price on a particular day. For example: In the case of L & T, the dividend yield is 1.02% that is Rs.27.5 of dividend declared during the financial year 2004-95 divided by Rs.2706 the market price of the company’s share on 21st Apr 2006. Dividend yield of a company will keep changing on a daily basis with change in the market price of its share.

Companies offering high dividend yields

Companies, with stable and cash-rich businesses and predictable annual growth, are he ones which offer good dividend yields. These companies usually have a track record of paying dividends consistently over a period of years.

The benefits of investing in dividend yield stocks

When the price of a stock rises, its dividend yield falls. For instance, if a co has paid out Rs.10 per share as dividend during a year, when the market price is Rs.50, he dividend yield is 20% that is dividend yield = dividend amount/market price. However, if the market price of the company’s share rises to Rs.75, the dividend yield will fall to 13.33%. Now, being a dividend yield investor, you would sell your investment when the market price of the stock rises, in order to switch to a stock offering a high dividend yield. This implies that you will automatically book profits when the markets move upwards. Also companies offering high dividend yields are usually fundamentally strong whose market prices are relatively stable.

Using the Mutual fund route

One way to conveniently invest in dividend yield stocks is to invest in dividend yield funds. Presently there are, about 6 dividend yield funds investing in dividend yield stocks. The minimum investment required by these funds is Rs.5000. They usually levy an entry load of 2.25%. The corpus sizes of these schemes are in the range of a minimum Rs.148 cr ABN AMRO dividend yield fund to a maximum of Rs.728 crores.

Dividend yield funds have offered acceptable returns over the last one year period. Most of these funds have been launched recently and hence, do not have a track record exceeding 6 months to a year.

Assigning a portion of the investment portfolio to high dividend yielding equity will moderate the portfolio risk.

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