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Bond funds plan healthy dividends

Income distribution unlikely to attract dividend strippers

Riding on the unprecedented bull-run in bond markets, debt funds are planning to shower their investors with lavish dividends. While Pioneer ITI Income Builder tops the chart with an expected income distribution of 15% or Rs 1.5 per unit, Prudential-ICICI Income Fund is likely to dole out a dividend of 7.5% (0.75 per unit). SBI Mutual Fund's Magnum LIF also aims to declare a half-yearly dividend of 7.25%. All bond funds with dividend payouts have record dates in September.

While dividend income is surely on the higher side by bond fund standards, it is unlikely to attract short-term investors except (may be) in the case of Pioneer ITI Income Builder Account. One, dividends in bond funds come with a cost with an 11% dividend tax. Two, a dividend in the range of 7-8% is unlikely to translate into a substantial (notional) capital loss. Dividend stripping was rampant in equity funds since the normally payouts ranged around 50%. "Anyway, this year has hardly seen any capital gains and hence, investors do not need to offset these gains,'' says a leading distributor. Three, with attacks on the US, the markets are shrouded in uncertainty. Thus, despite a largely stable bond market with surfeit of liquidity, speculators may not be willing to stay invested for three months. The budget for 2001 had stated that investors in a fund, which declares dividend, should either enter the fund three-months prior to the record date or stay put for three months after the record date.

However, if some bond funds manage to attract hot inflows, the fund house will benefit from the growth in asset base for at least three months and earn a healthy management fee. The AMC will also benefit by levying an exit load though a bulk of the load charged is paid back as selling commission.

The Dividend Brigade
  Fund  Dividend (%)  Option*  Current NAV (Rs)  Yield (%)
  Birla Income 3 Q 10.31 2.91
  IL&FS Bond 3 Q 10.51 2.85
  Pioneer ITI Income Builder 15 HY 14.95 10.03
  Pru-ICICI Income 8 HY 10.99 7.28
  Magum LIF 7.25 HY 10.91 6.65
  Sun F&C Money Value 7.5 HY 10.94 6.86
  Templeton India Income 2.5 Q 11.27 2.22
  Q - Quarterly    
  HY - Half-yearly