Ex-dividend NAV
The NAV of a scheme after an IDCW has been paid out, lower than before by the amount distributed. Reinvestment of the IDCW happens at this NAV.
In plain language
When a scheme pays an IDCW, the money comes out of the scheme's own assets. So the value of each unit has to fall by that amount — nothing has been created.
The workbook names the two NAVs either side of the distribution. After a dividend is announced, and until it is paid out, it is referred to as cum-Dividend NAV. The reduced NAV, after a pay-out of Income Distribution cum Capital Withdrawal, is called ex-Dividend NAV.
The Chapter 9 sample question describes it in exactly those terms: the NAV of the scheme after the dividend is paid out, which has dropped to the extent of the dividend.
How it works
The drop. In both the payout and the reinvestment options, the NAV declines to the extent of the dividend. In the growth option no dividend is declared, so the NAV captures the portfolio changes entirely.
Reinvestment happens at the ex-dividend NAV. The workbook's own numbers: a dividend of Rs 2 per unit on 100 units is Rs 200; at an ex-dividend NAV of Rs 20, Rs 200 ÷ Rs 20 = 10 units are added.
The distribution is set on face value. In Illustration 9.1 the NAV is Rs 12 and a 10 percent dividend is declared. That is Re 1 per unit (10 percent of the Rs 10 face value), so the ex-dividend NAV is Rs 12 − Re 1 = Rs 11.
Why the fall is bigger than what reaches the investor. Since the February 2020 Budget, the distribution is taxed in the investor's hands at the applicable slab. The workbook points out that the NAV of the scheme goes down more than the amount received in the hands of the investor — the NAV falls by the gross distribution, while the investor keeps the distribution less tax. Before 2020, the NAV fell by the dividend and the dividend distribution tax.
Not to be confused with a bonus issue. A bonus also lowers the NAV — proportionately, because more units now share the same net assets — but nothing leaves the scheme and the holding's value is unchanged.
The formula
IDCW per unit = Declared % × Face value
Ex-dividend NAV = Cum-dividend NAV − IDCW per unit
Reinvested units = IDCW amount ÷ Ex-dividend NAV
A worked example
Harish holds 2,000 units of a hybrid scheme whose NAV is Rs 25.50 when a 15 percent IDCW is announced. Figures are illustrative.
IDCW per unit = 15% × Rs 10 face value = Rs 1.50
Cum-dividend NAV = Rs 25.50
Ex-dividend NAV = 25.50 − 1.50 = Rs 24.00
If Harish is in the payout option: he receives 2,000 × 1.50 = Rs 3,000; his 2,000 units are now worth 2,000 × 24 = Rs 48,000. Total Rs 51,000 — exactly what the units were worth at Rs 25.50.
If he is in the reinvestment option: the Rs 3,000 buys units at the ex-dividend NAV. Stamp duty of 0.005 percent (Rs 0.15) is deducted first:
Units added = 2,999.85 ÷ 24.00 = 124.994 units
Holding = 2,124.994 units × Rs 24 ≈ Rs 51,000
If his slab rate is 30 percent (illustrative): the payout nets him Rs 2,100 after tax, but the scheme's NAV still fell by the full Rs 1.50 a unit — the gap the workbook highlights.
Why NISM asks about it
Chapter 9.3.2 defines cum- and ex-dividend NAV and works the reinvestment arithmetic (Rs 200 ÷ Rs 20 = 10 units; Illustration 9.1's Rs 12 falling to Rs 11), and the first Chapter 9 sample question asks for the term directly. Chapter 8.3 adds that the NAV falls by more than the investor receives after tax, and Chapter 9.4 contrasts the proportionate NAV fall on a bonus issue.
Common exam traps
- Ex-dividend is after, cum-dividend is before the payout.
- Reinvestment is at the ex-dividend NAV, never the cum-dividend NAV.
- The fall equals the IDCW per unit, which is a percentage of face value (Rs 10), not of the NAV.
- Payout and reinvestment options both see the NAV fall; the growth option does not.
- The investor is no richer on the ex-dividend date — units × NAV plus cash equals the value before.
- A bonus issue lowers the NAV too, but proportionately and with no money leaving the scheme.
Where this is taught
- Series V-A · Chapter 9: Investor Servicesintroduced here
- Series V-B · Chapter 9: Investor Servicesintroduced here
Related terms
- Face valueThe denomination a company's capital is divided into and carried in its books — fixed, printed on the certificate, and the base on which dividend percentages and stock splits are computed.
- Net Asset ValueThe net assets of a mutual fund scheme divided by the number of units outstanding — what one unit of the scheme is worth on a given day, after every liability except the unitholders' own.
- Bonus sharesAdditional shares issued free to existing shareholders in proportion to their holding — no tax at allotment, a nil cost of acquisition, and a fresh holding period from the allotment date.
- Dividend Distribution TaxThe tax a mutual fund scheme itself deducted before paying a dividend, abolished from April 2020 — since when the payout has instead been taxed in the investor's own hands at their slab rate.
- IDCWThe renamed dividend option of a mutual fund scheme — a payout that is part income and part return of your own capital, which is why the NAV falls by exactly the amount distributed.
- Cum-dividend NAVThe NAV of a scheme's units after a dividend is announced but before it is actually paid out or reinvested — the NAV still includes the value that is about to leave as dividend.
- Transfer of IDCW planA facility that automatically invests the IDCW (dividend) declared in one scheme into another scheme of the same mutual fund, on the next business day after the record date.
- Deferment of taxesThe advantage of the growth option: scheme income is tax-exempt and capital gains are taxed only when units are sold, so returns compound for years before any tax is paid.