Earlier we had spoken on how to get regular income month after month. We had said we put some money in Fixed Income generating securities, Income funds, Dividend yielding shares and Equity mutual funds. I don’t think we need to go into Fixed Income generating securities, since this is where most of us invest without thinking viz. Bank deposits, recurring deposits, Post office monthly Income schemes, etc.
In the last article I spoke of dividend yielding shares. Now let us look at Mutual funds. Before we move into mutual funds, we need to understand the basics of Mutual funds. Whenever we buy or sell mutual funds, we actually buy or sell units of mutual funds. How are these units priced? Since they are not traded on the stock exchange, unless they are Exchange Traded Funds (ETF’s), the pricing of mutual funds is based on NAV’s.
What is NAV?
NAV is Net Asset Value, as the name suggests it is arrived at after dividing the net assets of the mutual fund (current value of securities and cash and reduced by the liabilities, if any) by the number of units outstanding.
NAVs are also used to track the performance of the mutual funds. Unlike the prices of stocks which keep changing every second, the NAV is calculated based on the closing prices of the stocks held by the mutual fund. NAV is an important tool to see the returns on your mutual fund investments.
You can keep a check on the NAVs to see the performance of your mutual fund.
The purchase or sale of a unit of mutual fund is its NAV plus or minus entry or exit loads if any.
Entry load is the extra amount you pay when you invest in a scheme. It is also called front-end load or sales load.
Exit load is the amount collected when you are selling or redeeming units.
Effect of dividend payout on NAV
While analyzing a mutual fund scheme on the basis of its NAV performance, you must also check, whether the scheme is a dividend paying scheme or a growth scheme. Usually a mutual fund would have options, dividend and growth. In case of a dividend paying scheme, the NAV shall not reflect the actual returns of the scheme, because, each time when the dividend would have been declared, the NAV would have come down to off set its effect.
As mentioned earlier NAV is the net asset value and the NAV would go down since cash would get reduced from the assets when dividend is declared. If you compare the same scheme with dividend payout and growth option you would discover that the NAV of the growth option of the same scheme is much higher than that of the dividend option scheme.
It is always prudent to judge the performance of a mutual fund by analyzing the NAVs of its growth schemes.
How to get income month after month
What is said above is fine; we will see details about mutual funds in another article. Our main concern is we need to get income month after month; how do we go about achieving this. After going through the performance we decided which funds are good for us.
But does this assure us regular income? First thing to remember, mutual fund returns are not assured. All funds have a pattern of dividend declaration. Check the pattern and choose funds in such a way that we would get some dividend every month. By this we have done 2 things. Ensured that the funds selected are good and also we get income every month.
After saying all this, we need to regularly monitor our funds performance with some benchmark. In case we notice the performance is going down, we should move the funds to another scheme. After all we want regular income.
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