Why does the value of a mutual fund go down by the equal amount of the dividend paid?
July 14th, 2010
While I was happy to get a 25 cent dividend, I then noticed that the NAV of my mutual fund went down by 25 cents. So, in the end, are dividends useless to the investor? Please tell me what the story with this is. Thanks in advance.
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Posted in Top Rated Mutual Funds | 
Tags: dividend, dividends, investor, mutual fund, nav, thanks in advance
In evaluating the performance of a mutual fund, NAV is NOT the thing to look at. Total Return is what matters.
I don’t completely agree with msbroker. In the real world, a company is priced by what investors are willing to pay for it. They price it, not on todays value of the company, but by what they think the value will be 1, 5, 10, etc years down the road. So you can receive a stock dividend and not see a decrease in price by an equal amount.
Mutual Funds are priced differently. They are priced at their net asset value, in other words, the value of the stock of all the companies they hold plus any cash (short term paper, money market funds, etc) the mutual funds also holds. So, in giving you that 25 cent dividend, the NAV of the fund went down by 25 cents and you saw that in the 25 cent lower price. Also, with the price of some stocks going up and some going down, the overall value of all the funds stock holdings did not change from the previous day. If you check prices during the year, you will find daily changes of mutual funds a lot less than daily changes in single stocks.
A Dividend is not the same as receiving Interest. When you get a dividend, the stock is always adjusted down the amount of the dividend to reflect the payment. It makes it fair for all investors. There is no advantage to buying a stock before or after the dividend is paid. If you buy before, you’ll pay a higher price but you’ll also get the dividend. If you buy after, you won’t get the dividend but you’ll pay a lower price. This is the same for mutual funds too