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Equity Fund Dividends: How Alluring?

Surprsingly two equity funds declared dividends - Masterplus and Birla MNC Fund. Read more to find why you should get past these lofty dividends.

Equity funds are struggling to make a comeback. This week's dividend announcement from an otherwise unexpected class was surprising. First, the 12 per cent dividend from Unit Trust of India's Master Plus '91. All investors of the fund as on February 8, 2002 will get the dividend.

Masterplus, a large equity fund announced its third dividend since its open ending in October 1998. Earlier, Masterplus gave two dividends – 15 per cent in November 2002 and 12 per cent in June 1999. Launched in December 1991, MasterPlus'91 has given a total return of 6.57 percent since inception. A below average performance against benchmarks and other equity funds in a long period. But today it has a well-diversified large-cap equity portfolio to benefit from market upsurge.

The other surprise was from Birla MNC Fund, which declared a 40 per cent dividend, its second dividend after 25 percent in February 2000. The record date for the dividend is February 22, 2002. Birla MNC invests only in MNC stocks offers a good investment theme. But has not been a great performer since its start in December 1999. The fund lost 23.5 per cent in 2000 and another 12 per cent in 2001. Birla MNC Fund started in December 1999 after converting the erstwhile Apple Goldshare Fund. As the fund has substantial reserves, the fund is able to give these dividends. Infact, had Birla MNC been a new fund launched on December 12, 1999 and a face value of Rs 10, its NAV would have been Rs 7.33 as on February 1, 2002.

Both dividends declared being from open-end equity fund, it will be totally tax-free for investor. But don't get tempted by these dividends alone. These dividends do not offer any short-term dividend stripping opportunity as before March 2001. If you are eyeing to gain from the tax-free dividend in the short-term, it may not be possible. Last year's budget plugged the dividend stripping in a fund by clamping a minimum holding period of three months before or after the record to take tax credit for a short-term capital loss.

Secondly, in an open-end equity fund, performance is the key. Dividend should just be looked at as a tax efficient way of realising returns. If a fund does very well and does not declare dividend, then an investor can very well realise a needed part of the gain by redeeming units. Hence, dividend from a fund might be psychologically comforting but no way is an indicator of a fund's good health or great performance.

These dividends could be a trigger to an investment in the fund only if you consider that these funds will fit in your long-term investment plan and are in sync with you risk tolerance and return expectations. The long-term performance of Masterplus is uninspiring. And Birla MNC has a strong investment appeal, but has yet to prove its credential as an attractive investment opportunity. Indeed, the fund has only seen a bad market since its start in December 1999.

Fund Update: During the week, the market just ticked with a 2-point gain on the Sensex and 11-points gain on the National Index. The key gainers during the week were – UTI Petro (6.76%), JM Basic (5.98%), DSPML Technology.com (3.72%), Boinanza Exclusive (3.30%) and Magnum Contra (3.11%).