Some frontline mutual funds that were generous with dividends have turned austere. This is in spite of the market recovery from December lows, when equity based funds have gained about 15-20 per cent from their lows. The one exception appears to be HDFC Mutual Fund, which has kept the payouts at previous years' levels or at about 10 per cent of the NAV, in some of its popular schemes.

What has come as a surprise is that dividend payouts of schemes that have respectable NAVs have also shrunk, making investors wonder if the reason is lack of adequate distributable surplus or reluctance to book profit to pay higher dividends.

Dividend payments from equity funds were even used as a tool to market these products and it was not uncommon to see fund houses dishing out 70-100 per cent dividend payouts. Reliance, Birla Sun Life and HDFC were some of the fund houses that came out with generous payouts. The fact that they had a steady inflow and a large corpus, apart from the robust status of the market that fuelled investor interest, all facilitated this. But this was upended by a SEBI diktat in 2010 that stipulated that MFs should make payouts from realised gains and not from tapping the unit premium reserves.

While this is understandable in funds that have shed value due to market volatility, even funds that sport schemes with high NAVs have become suddenly miserly in paying dividends.

Mr C.J.George, Managing Director, Geojit BNP Paribas Financial Services, said since the dividend payouts mainly depend on the realised gains and as the markets were volatile in the last couple of months, “some fund houses are perhaps adopting a wait and watch strategy.” Also the future market expectation was crucial when it comes to realisation of gains on the investment. “This is a fund management call,” he added.

Mr George, on whether post-DTC implementation the dividend option would still be a better choice, said the “fine prints of the DTC on the taxation of dividends' would have to be seen but at the moment, going by the wide spread expectation, a proposed 5 per cent dividend distribution tax on equity funds will apparently be a slice-cut on the scheme's returns under dividend plan. For a long term investor, growth option was a better choice.” On whether the failure to sell during the market recovery in January to pay for dividends could have been a reason, he said the SEBI data confirmed that the domestic institutions, particularly the mutual funds, were net sellers in January 2012 and February 2012 to the tune of Rs 4,029 crore in equities. How much of this could be for profits so as to be eligible for dividend payout remains to be seen.

The critics of dividend option point out that fund houses use the money due to the investors to make the payment.

They would point out that growth option offered the benefit of compounding. Though valid, this misses a key point – dividend option is availed by investors to meet their needs. It also enables them to indirectly earn some profit from their investment.

Investors could draw some solace from the fact that lower dividend would mean lesser fall in NAV due to dividend payouts and help narrow the gap between dividend and growth options, since unpaid profit is retained within the scheme!

>ryn@thehindu.co.in

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