Rise in portfolio value triggers higher dividends.
The mutual fund industry is trying out every rule in the book to bring retail investors back to equity funds. The latest is a series of generous dividends the industry has announced – as many as 56 equity schemes have declared dividends in the last three months, in some cases as high as 75 per cent, totalling Rs 600 crore in payout.
Coming out of the drought of 2008, many funds have seen their portfolio value rise, goading them to distribute dividends.
The dividend payout is especially evident in tax planning schemes as many investors get into equity-linked saving schemes (ELSS) funds this time of the year. Schemes such as Religare Tax Plan, Sundaram BNP Paribas Tax saver, ICICI Pru Tax Plan, Bharti Axa tax Advantage and JP Morgan India Tax Advantage have announced dividends of 10-40 per cent.
| TAKING GUARD |
| * The Solvent Extractors Association (SEA) has sought curbs on the futures trade in oilseeeds, saying high prices have squeezed crushing margins of millers in a statement today |
| * SEA argued that six-month forward contracts always give rise to speculative activity, which is not healthy for Indian market conditions |
| * Oil mills are currently operating at 50 per cent of installed capacity due to non-availability of raw materials, as farmers are not willing to sell oilseeds, in anticipation of higher futures prices |
| LOOSENING PURSE STRINGS Top 10 dividends: Equity Funds | ||
| Scheme | Record 2009 | Dividend (%) |
| BSL Advantage-D | 23-Sep | 75 |
| BSL MNC-D | 23-Sep | 70 |
| Magnum Multiplier Plus-D | 22-Oct | 70 |
| BSL Equity-D | 15-Oct | 50 |
| Reliance Growth Inst-D | 30-Oct | 50 |
| Reliance Growth-D | 30-Oct | 50 |
| Reliance Vision Inst-D | 27-Nov | 50 |
| Reliance Vision-D | 27-Nov | 50 |
| ICICI Pru Tax Plan-D | 4-Dec | 40 |
| Reliance NRI Equity-D | 18-Sep | 40 |
| Source: Valuereserce online | ||
“Funds are sitting on huge gains from their portfolios, so they are giving it back to investors. The other strategy is to get incremental inflows by announcing dividends because many investors are tempted to invest at this time just to get the dividend. The flow of money to mutual funds has declined, as distributors are not aggressively selling mutual funds. Therefore, it becomes necessary to create some attraction for investors,” said Maju A Nair, head of distribution at Sharekhan.
Every time a fund scheme announces a dividend, the NAV, or net asset value, of the scheme drops by an amount equal to the dividend amount. Within the scheme, the NAV of the growth option is always higher than that of the dividend option because money goes back into the scheme. For equity schemes, dividends attract zero tax, whereas for debt schemes dividends attracts lower tax compared to capital gains if the holding period is less than a year.
“WE had surpluses, so we booked profits and distributed it to investors. On appreciation of portfolio a retail investor also books profits. However, instead of that, we booked profits and paid it as dividends. Last year the markets were bad, so mutual funds avoided dividends. But this time, the markets have turned around, making retail investors look for income from their investments. It is a confidence-building measure among retail investors. However, the exact impact remains is yet to be seen,” said Vikas Sachdeva, country head-business development at Bharti Axa Investment Managers.
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Market watchers say a spurt in dividend distribution also means that fund managers are no longer comfortable with valuations. Instead of sitting on cash or making fresh investments, they consider it better to redeem and pay back to investors. A lot of fund managers are cautious and considering equities to be overvalued.
“Retail investors feel disenchanted with equity funds reflected in the net outflows every month. So, it is a good move to retain investor in the scheme. It also shows that the scheme has performed well over a period of time and is confident enough to reward investors,” said Dhirendra Kumar, CEO, Valueresearch Online.
Dividend distribution also leads to a decline in the assets of the scheme. It has also made mutual funds net sellers in the markets as they need to book profits.
“Most companies have to pay advance tax during this time and fund houses pay dividends to show them on the balance sheets,” said a distributor.