Don't be confused by face value

When mutual funds change their unit values, investors think there is a real change. In reality, it is not.

Many investors must have experienced a change in the face value of shares, whereby the share value also changes officially on the stock exchange. This step is usually taken when share prices become very high (in absolute terms) and the company wants more number of investors to be able to access the stock. This changes the number of the shares the investor holds but the total value of the investment remains intact. While this is a common experience in stock investment, such a situation can arise with mutual funds (MFs), too.

Specially so in debt-oriented funds, that have different face values. Thus, it is not uncommon to find schemes with face value of Rs 10, Rs 100 and even Rs 1,000. The investor will have to check details of the conditions before making an investment. There are also cases where fund houses have changed the face value of units and this results in additional implication for investors. Here are some of such implications that need to be considered, for they impact the way in which the investment is managed.

DIVIDEND DECLARATION
Firstly, investors need to think about dividend declaration - the rate at which the scheme will announce the dividend. There will be no change in the manner of intimation of the rate at which dividend is declared, if the scheme wants to keep the same rate. For instance, if the rate on a fund of face value Rs 100 was 2 per cent, it will remain at 2 per cent even if the units have a different face value of say, Rs 10.

There will, however, be a change in the dividend on a per unit basis because it is on a lower base. So, in the above example, the dividend will work out to Rs 2 per unit when the face value is Rs 100, while with face value of Rs 10 it will be Rs 0.2 per unit.

The difference in the value of dividend given above will be matched by the change in the number of units in the investor’s account. Therefore, in the first case (Rs 100 face value), the number of units might be 100, which will increase to 1,000 after the change in the face value (Rs 10).

Ultimately, what it does is to keep the final dividend amount same when the rate of dividend is same. Investors have to understand that the change in the face value will not impact the dividend payout because this is dependent on the fund’s performance.

NET ASSET VALUE
Earlier, a scheme with higher face value used to have a bigger net asset value (NAV). Even if the change in face value is not very significant, a higher face value, is more visible to the investor. So, a fund of NAV Rs 100 moving two per cent will up the face value to Rs 102, which easily catches the investor's attention.

If a fund has a lower face value, the change (increase) in value tends to get hidden in the decimals and has a bigger impact on the investor psyche.

Let’s say, a fund’s NAV at Rs 10 moves up by 2 per cent to Rs 10.2. The overall position is the same in actual terms but the investor feels he got a meagre rise. The final investment has the same impact, so this will not impact the investment value but the investor needs to know that.

UNDERSTANDING
Since many funds have a face value of Rs 10, most investors are accustomed to such funds. If the face value is higher, they need to decode the information. When it comes to the actual operations, there is a lot of difference, except that the investor will have to deal with a different number of units in the portfolio once the face value changes. There is also no signal impact visible when there is a change in the face value, as unlike a bonus issue in an equity share, there is no question of servicing a larger equity in this case. Ultimately, it is performance that determines returns for the investor.

The writer is a certified financial planner