Why mutual fund dividend option (IDCW) returns are not published?

This post was originally published on this site

Anand has an interesting question, “Dear Pattu Sir, I was looking to invest in a mutual fund offering regular dividends* but I can only see the returns of the growth option listed everywhere. Can you please explain why dividend option returns are not published?”

* SEBI has mandated that mutual fund dividends be called “Income Distribution cum Capital Withdrawal (IDCW)”. Many investors assumed dividends were “extra” without appreciating that they are derived by selling stocks or bonds (capital withdrawal from the fund) and distributed as income to unitholders. For more information on how this works, see: When do mutual funds declare dividends. We shall continue to use the term dividends in this article as IDCW is quite grotesque.

Mutual fund dividend option returns are never published because if computed correctly, the dividend option return will always be the same (ideally) as the growth option. A practical calculation will result in slight return differences.

The NAV of a dividend option is always lower than that of the growth option./ For example, ICICI Bal Adv Fund Growth Option Regular Plan has a NAV of 48.31 (17th Sep 2021), while the ICICI Bal Adv Fund Monthly IDCW option Direct Plan has a NAV of 17.21 on the same date.

This is because each time a dividend is declared, the net asset value (NAV) decreases by an amount equal to the dividend rate – (typically a few rupees per unit)

This lower NAV is known as Ex-dividend NAV

(Ex-dividend NAV + Div. Rate = Cum-Dividend NAV)

SEBI has mandated that dividends should be deemed as reinvested at ex-dividend NAV for calculating returns.

This means you cannot calculate XIRR this way:  enter the investments amounts with a negative sign with dates; enter the dividends received with a positive sign (payout) with dates; enter the current value with a positive sign with the date; compute XIRR. You are guaranteed to get a different return from a corresponding investment in the growth option.

  • Suppose a new fund was started on 1st Jan 2020. The NAV of all the options (growth and IDCW) will be Rs. 10 per unit.
  • On March 1st, the NAV of the growth option was, say, Rs. 12 per unit. The dividend option (IDCW) NAV was Rs. 10 per unit. A dividend of Rs. 2 per unit was declared (we will assume on the same day for simplicity), and the IDCW option NAV fell from Rs. 12 per unit to Rs. 10 per unit.
  • On  Sept 1st, the growth option NAV was Rs. 15 per unit. The dividend option NAV was Rs. 12.5 per unit.

Over time the difference in NAV can be significant.

Comparison of Franklin India Bluechip Fund (IDCW Payout) vs Franklin India Bluechip Fund (G) NAV since inception to illustrate the impact of dividends

Let us compute XIRR the wrong way (or the easy way) first.

Growth option

Date Transaction
01-01-2020 -10
01-03-2020
01-09-2021 15
XIRR 27.51%

We will follow the convention that investments are designated as negative and redemptions or payouts as positive. The opposite can also be used. So 1 unit of the growth option for Rs. 10 was purchased on 1st Jan 2010, and its value as of 1st Sep 2021 is Rs. 15

Dividend (IDCW) Option

Date Transaction
01-01-2020 -10
01-03-2020 2
01-09-2021 12.5
XIRR 29.85%

Here we used the lazy approach and assumed we had received Rs. 2 as a dividend payout. Notice that dividend option XIRR is more than 2% different from the growth option XIRR.

This is wrong because the growth option keeps all the money in the fund and does not distribute it. The growth option NAV has grown by 25% from March 2020  to Sep 2021, and so has the dividend option NAV. If the dividend was not declared, both options would result in the same return.

There is no way to compare the two returns unless the dividends are assumed to be reinvested back into the fund. Please note: It does not matter what the investor does with the dividend payout. Whether they reinvest into the same fund or not, the dividends will have to be assumed as reinvested for dividend option return calculation.

XIRR usage is a classic example of garbage in, garbage out. Just because the XIRR solver provides a return does not mean it is correct. The inputs have to make sense first.

If we don’t do this, the investment return will be wrong. So for this simple example:

The right way to compute XIRR from dividends

Date Transaction
01-01-2020 -10
01-03-2020 2
01-03-2020 -2
01-09-2021 15
XIRR 27.51%

Here the Rs. 2 received as dividend is reinvested back into the fund. Then the XIRRs of growth and IDCW options match.

The real-world calculation with multiple dividends is quite cumbersome. See: How to calculate returns from Dividend Mutual Funds?

Many stock investors and stock analysis portals make the mistake of treating dividends as payouts. This means they can never benchmark their stock returns with a fixed-income instrument or equity index. They will get “some” return number that does not reflect the risk premium in the investment. Meaning it is useless. That most investors don’t want to (or are too scared to) benchmark their investments is another matter!

If you want to do it right (compute XIRR with reinvested dividends), you can try these. Stocks: Compute XIRR (annualised return) of stocks and stock portfolio with this sheet! Mutual funds: Automated Mutual Fund Performance Tracker.

In summary, a dividend option or IDCW option mutual fund will always have the same return as the growth option when dividends are assumed to be reinvested (this is the universal convention for both mutual funds and stocks). Therfore mutual fund dividend option returns are not explicitly published as there is no need for this.

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M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored three print books, You can be rich too with goal-based investing (CNBC TV18), Gamechanger, Chinchu Gets a Superpower! and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] com


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