First of all, understand what is NAV price. I always like to explain things by using simple examples. Here goes...

- Fund ABC issues 1 million units at Initial Offer Price of RM1.00 per unit.
- As such, at Day 1, NAV of ABC is 1 million units x RM1.00 = RM1 million. NAV price is RM1.00.
- After the end of the Initial Offer Period, ABC starts to operate, it starts to invest.
- Let's say ABC bought RM200,000 worth of Maybank shares, RM300,000 of Dutch Lady shares and RM500,000 of BAT shares.
- Let's say after 1 month,

Market value of holdings
Maybank RM180,000
Dutch Lady RM360,000
Guinness Anchor RM400,000
BAT shares were sold off during the month
Total value of equities held: RM940,000
Cash: RM50,000 (dividends received from BAT)
Total value of net assets i.e. NAV: RM990,000
NAV price per unit: RM940,000 / 1 million units = RM0.9900

Ah Beng says: "ABC is now cheaper, can buy!"
Answer:
NO! You cannot determine the "cheapness" of a fund by looking at its NAV price alone. We can only deduce that the ABC had made an NAV loss of 1% during the 1-month period, but you cannot say that it is "cheap".
The fund could have bought Maybank when it was overpriced, and now its holdings of Maybank had gone down 10%. Maybank is now cheap!
Guinness Anchor could be oversold, thus ABC sold its holdings of BAT and bought into Guinness Anchor. Another undervalued stock in ABC's holding!
However, Dutch Lady have rallied 20% in the past 1 month, it could be overbought i.e. expensively valued now.

Simply said, you determine the "cheapness" of a fund by reference to its underlying holdings. The NAV price CANNOT give you a single clue as to whether it is an opportune time to buy into a fund.

Let's say u are looking at a fund which focuses on plantation stocks. Plantation stocks on the KLCI could be oversold, went down 20% in the past 1 month yet the fund only recorded an NAV loss of 5% in the same period. You might think, "aiya, only -5%, the fund is still expensive, don't want buy in now lah". But you could be terribly wrong; it could be that the fund was sitting on a heavy cashpile during the past 1 month, hence it did not lose much. But plantation stocks are now trading at a discount, it is an opportune time for the fund to buy!

Of course, all this is based on the assumption that the fund manager is not stupid.
If the fund manager still sits on its huge cashpile and refuses to enter the market, then later when plantation stocks rally up 30% the fund could still be sitting there with -5%/+5%.

Put it simply, dividend is just "left hand go right hand"; there is ZERO IMPACT to the investor's value of holdings.

- Fund XYZ has 100,000 units issued, initially issued at RM1.00
- Current NAV price is RM1.02
- XYZ declares a "10% dividend" of 10 sen a unit
- After the dividend, the NAV will go down to RM0.92

For sake of illustration, we assume that dividends are paid out in cash (not reinvested), and no tax on the distribution.

Ali says: "Eh XYZ very good, gave me 10% returns..."
Answer:
WRONG! The 10% is expressed by reference to the Initial Offer Price of RM1.00 (RM1.00 x 10% = 10 sen). It does not mean that the fund made a profit of 10% for investors. In this scenario, the fund actually only made a return of 2% (RM1.00 + 2% = RM1.02) during the period.

Simply said, just imagine you pass me RM100 to invest in a trolley cart. 1 year later the trolley cart become worth RM92, and I collected rental income of RM10 on your behalf. The value of your investment is now RM102. I then decide to return 10% i.e. RM10 to you. So now u have a RM92 trolley cart and RM10 in cash on hand. The "dividend" that I decided to give you has ZERO IMPACT on the net worth of your investment, which remain at RM102.

Here's another variation to the scenario above; your RM100 investment could actually have incurred a loss, and I could still decide to "reward" you with a 10% "dividend". Let's say a wheel on your trolley was damaged, now your trolley is only worth RM60. The value of your investment is now RM60 + RM10 (rental income received in cash) = RM70. But I could still proudly say that I'm declaring a 10% "dividend" to reward you

Key Lesson Point
A unit trust fund can declare dividend even when it has actually made its investors@unitholders poorer. By regulation, a unti trust fund can only declare dividend out of its REALISED INCOMES (interest income, dividend income, net proceed from sale of investments, rental income etc). Gains from market price fluctuations are not realised, i.e. they're "paper gain/(loss)". So, you could be having
(a) Fund A got realised incomes from which to declare dividends, even though during the same period it has huge paper losses.
(b) Fund B made lots of paper gains from market price movements, but it cannot/decided not to declare dividend to unitholders because of insufficient realised incomes. Bear in mind, some funds actually have a "no dividend" policy, and they are great performers.