A matter of dividend

A SEBI regulation is making fund schemes rethink dividends, especially under direct plans

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It is disappointing news for mutual fund investors who look forward to dividends from their investments. This became evident when a reader wrote in to us sharing his displeasure when he discovered the variance in the dividend paid out by an equity scheme in its direct and regular plan. With the advent of direct plans, there is a possibility that the scheme you have invested in may not pay out any dividend. And, in many cases the dividend from the direct plans was much lower than what you would have earned if you had a regular plan of the same fund scheme.

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According to the SEBI regulation, when units of an open-ended scheme are sold, and the sale price is higher than the face value of the unit, part of sale proceeds that represents unrealised gains will be credited to a separate account (Unit Premium Reserve). This sale proceed is treated on par with the unit capital and the same is to be utilised for the determination of distributable surplus. However, after SEBI tweaked this norm, AMCs are left with lesser amounts to distribute among investors.

The new stipulated rule by SEBI would result in lower realised gains in direct plans compared to their regular counterparts. As direct plans were introduced just a year ago, there is a greater possibility of lower unrealised gains in direct plans compared to regular plans of the same fund scheme. This is one of the reasons that caused the discrepancy.

An investor may look forward to dividends and view them as indicators of a fund's superior performance. Further, you must understand that AMCs are not bound by any law to declare dividends, as they can pay dividends only from the realised gains. Dividends in equity mutual funds are more for psychological reasons than any real value. After all, dividends paid to you are early payment of profits, which otherwise has the potential to further grow if left untouched.

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