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Question: Is it good to buy a fund just before it goes ex-dividend?

Answer: When a fund goes ex-dividend, the unit holders ( as of the ex-dividend date ) are paid out a dividend and the NAV of the fund declines by the amount of dividend per unit paid out. For an investor ( who has bought the fund prior to the ex-dividend date ), this results in an income that is tax-free in the hands of the investor and a capital loss ( as the ex-dividend NAV will be lower than the cum-dividend NAV at which the investor made his investment ) . For e.g., if a funds NAV is Rs11 and it pays out Rs1 as dividend, its ex-dividend NAV will be Rs10. In this case, the investor has a dividend ( tax-free ) income of Re1 and a capital loss of Re1 ( Rs11-Rs10 ) . If the investor has made a corresponding capital gain, then it is tax-beneficial to purchase the units of mutual fund just before it goes ex-dividend, take the dividend and then sell the units ( at the ex-dividend rate ) and book the capital loss. If there were no tax benefits, from a pure returns perspective, there would not be any difference in buying a fund cum- or ex-dividend.



Category Mutual Funds Interview Questions & Answers - Exam Mode / Learning Mode
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Question: Is it good to buy a fund just before it goes ex-dividend?
Answer:

When a fund goes ex-dividend, the unit holders ( as of the ex-dividend date ) are paid out a dividend and the NAV of the fund declines by the amount of dividend per unit paid out. For an investor ( who has bought the fund prior to the ex-dividend date ), this results in an income that is tax-free in the hands of the investor and a capital loss ( as the ex-dividend NAV will be lower than the cum-dividend NAV at which the investor made his investment ) . For e.g., if a funds NAV is Rs11 and it pays out Rs1 as dividend, its ex-dividend NAV will be Rs10. In this case, the investor has a dividend ( tax-free ) income of Re1 and a capital loss of Re1 ( Rs11-Rs10 ) . If the investor has made a corresponding capital gain, then it is tax-beneficial to purchase the units of mutual fund just before it goes ex-dividend, take the dividend and then sell the units ( at the ex-dividend rate ) and book the capital loss. If there were no tax benefits, from a pure returns perspective, there would not be any difference in buying a fund cum- or ex-dividend. Source: CoolInterview.com



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