Do Index Funds and ETFs pay dividends?

Do Index Funds and Exchange Traded Funds pay dividends?

Before we get into the details, you should know about Benchmark and Total Returns Index.

What is a Benchmark?

A benchmark is a group of securities which are considered as a 'benchmark' to measure a fund's performance. Benchmarks are generally broad market indices like BSE Sensex 30, NSE Nifty 50, with which mutual fund returns are compared with.

In case of index funds or ETFs, say a Nifty 50 Index Fund, the Index Fund is expected to give the returns of Nifty 50 index's performance less the expenses incurred by the fund.

For e.g, If Nifty 50 returns 10% per year, the Nifty 50 Index Fund is expected give the same returns of 10%.  

Total Returns Index.

The Nifty 50 index has India's top 50 companies and every year these companies declare dividends. 

Nifty Total Returns Index, is nothing but Nifty plus the total dividends announced by Nifty companies, which are assumed to be reinvested. Every year the about 1.5-2%,which is the dividend yield of Nifty 50, is added to Nifty 50.

So, currently Nifty 50, the price index,  is at 11,000 whereas the Nifty 50 Total Returns Index is at 15,700.

Prior to 2018, all the funds were benchmarked against price index, Nifty 50 in our case. But SEBI circular made all the funds to be benchmarked against Total Returns Index.(Nifty 50 TRI).

Image: Returns of HDFC Nifty 50 Fund vs Nifty 50 TRI. The difference is due to the expense ratio and tracking error. 

Index Funds India


What happened to dividends declared by these companies in Index funds?

Until 2018, Index funds and ETFs like Nifty Bees, SBI Nifty 50 ETF gave out dividends.

After 2018, the dividends are NOT given out, so that the index fund returns reflect exactly the same returns of Nifty 50 TRI.

So, if you check the returns of index funds or ETFs compare them with Total Returns variant of the benchmark index, like Nifty 50 TRI or Nifty Next 50 TRI or Bank Nifty TRI.

Know more about Total Returns Index.

Any views or comments, do post in the comments section.

Why Is Asset Allocation Important?

Asset Allocation 101

Asset allocation involves dividing an investment portfolio among different asset categories, such as stocks, bonds, gold and cash. The asset allocation that works best for you will depend largely on your return objectives, time horizon and risk tolerance.

Why Asset Allocation is So Important? 

By including asset categories with investment returns that move up and down under different market conditions within a portfolio, an investor can protect against significant losses. 

Check the image below.

Over the last 20 fiscal years equities, debt & gold have outperformed each other at different times and no single asset class continues to outperform or underperform. 


Asset Allocation
Image Source HDFC

The Connection Between Asset Allocation and Diversification.

Diversification is a strategy that can be neatly summed up by the timeless adage, “don’t put all your eggs in one basket.” The strategy involves spreading your money among various investments in the hope that if one investment loses money, the other investments will more than make up for those losses.


Illustration of Moderately Aggressive Portfolio:

Moderately aggressive model portfolios are often referred to as balanced portfolios since the asset composition is divided almost equally between fixed-income securities and equities. The balance is between growth and income. 

You can modify the proportions to suit your own individual investment needs. 

Asset Allocation
Image source Investopedia

Rebalancing your Asset Allocation. 

You’ll find that some of your investments will grow faster than others. By rebalancing, you’ll ensure that your portfolio does not overemphasize one or more asset categories, and you’ll return your portfolio to a comfortable level of risk.

For example, let’s say you determined that stock investments should represent 60% of your portfolio. But after a recent stock market increase, stock investments represent 80% of your portfolio. You’ll need to either sell some of your stock investments or purchase investments from an under-weighted asset category in order to reestablish your original asset allocation mix.


While each person's asset allocation strategy will be unique, consider these points:

  • Invest in stocks, bonds and some gold.
  • Consider increasing your stock allocation for long time horizons, predominantly use Index Funds to build your portfolio.
  • Keep sufficient cash on hand for short-term needs.

By staying in the market through different market cycles, you reduce the risk that market volatility will adversely affect your portfolio's performance.  

Computer Age Management Services CAMS IPO Review

CAMS (formerly known as Computer Age Management Services) is India’s largest registrar and transfer agent (RTA) of mutual funds. CAMS provides a comprehensive portfolio of technology-based services such as transaction origination interface, transaction execution, payment, settlement, record keeping, brokerage computation and compliance related services.

Issue Details:

Issue Opens: September 21 ,2020.
Issue Closes: September 23 ,2020.
Issue Size:  Rs.2240-2242 crore
Issue Price Band: Rs.1229-1230

No. of shares on offer:  1.8cr.
Minimum lot size (no of shares): 12.

Largest services provider in growing mutual funds market:

The Indian mutual fund industry comprises 41 AMCs with major market share contributed by top 10 AMCs. As on June 2020, ~59% of total MF AUM is managed by top five AMCs. 

As on June 2020, CAMS services four out of five largest AMCs - HDFC MF, ICICI Prudential MF, SBI MF and Aditya Birla Sun Life MF. In terms of top 15 AMCs, it has ~70% market share in MF RTA business. 


Strong RoE, consistent EBITDA margin.

CAMS has delivered a robust financial performance with revenue growth from 478 crore in FY17 to 699 crore in FY20, registering 14% CAGR. Accordingly, CAMS has delivered consistent EBITDA margin in the range of 35-40% in FY17-20 while RoE has remained strong at or above 30% in FY17-20. 

source icici

Key risk and concerns:  

  • Growth dependent on AUM size and mix.
  • Information technology disruption to impact operations.
  • Concentration risks to persist.

Conclusion: The IPO is priced at P/E of ~34.5x FY20 on upper end of band. Though the companys has Strong RoE & consistent EBITDA margin, the pricing is on the higher side. 

The company has finalised the allocation of 54,19,230 shares at ₹1,230 apiece to 35 anchor investors, indicating good demand.

With current IPO market being booming, there will be good listing gains. Investors with long-term view can apply for the issue.

Weekend Link Fest: Sep 19, 2020

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