Dividends from Equity Funds have virtually dried up in presumably the last year of tax-free status.
20-Jul-2001 •News Desk
Perturbed that you haven't received a dividend cheque from your fancied equity or balanced fund? Well, blame it on the ruthless equity markets! Even as the current financial year is presumably the last for tax-free dividends from equity-oriented schemes, income payouts have virtually dried up due to a bearish stock market. While the first six months of calendar 2000 saw 70 equity and balanced funds dole out dividends, the current year has seen dividends from only 24 funds. Worse, the average quantum has fallen from 40 per cent or Rs 4 per unit last year to current levels of 22 per cent or a mere Rs 2.2 per unit. Apart from US-64 dividend, which is an annual affair, the last dividend in the current year was declared way back in early April. It may be recalled that the budget for 1999 had made dividend income tax-free from open-end funds with over 50 per cent allocation to equity for a period of three years. Thus, this tax-break should end in May 2002.
Riding on a strong equity market, the incentive had lead to a flurry of payouts in early 2000 with some funds even dishing out a 200-300 per cent dividend and attracted strong inflows. The tax-free status for equity funds also encouraged rampant dividend stripping, with asset management companies making hefty gains by facilitating short-term investments and earning a fast buck by charging loads. However, this loophole was plugged in this year's budget since the exchequer was losing on tax-base revenue. In fact, most of the dividends declared in the current year were to indulge in dividend stripping before it was put to an end.
"Its an irony of fate - while the tax-free status could go in the next budget, funds can hardly make a payout as markets have been on a fall. Further, selling in this market is anyway a problem due to a shrinking of volumes after introduction of rolling settlement,'' says the Delhi-head of a private sector mutual fund. However, the sustained downturn is just one of the part of the story since funds paid dividends even early this year. The sudden drought is also attributed to the end of dividend stripping and hence, AMCs have little incentive now to declare dividends.
Option Before Investors
If you entered an equity fund to earn a quick tax-free dividend, the current dry spell is surely a huge disappointment. At the same time, you couldn't have been more wrong. Investments in equity funds are clearly not meant for regular income but these funds are an ideal vehicle for long-term wealth generation. In fact, before this tax-break was introduced, most equity funds did not have a dividend option!
Thus, it is important that you do not lose sight of your long-term objective for short-term incentives. With little hope for a market revival in the near future, you are unlikely to earn a hefty dividend from your equity fund. So, if you had made a wrong investment decision in pursuit of a tax-free dividend, its time you stand corrected.