If you had invested in Fidelity Equity Fund (FEF) when it started, back in 2005, there’s a small reward coming your way. Fidelity Asset Management Co. Ltd has decided to distribute bonus units to those who had invested during the new fund offer period.
FEF was the first scheme that Fidelity had launched in India in May 2005 and it declared its first net asset value (NAV) on 18 May 2005. Both FEF and the fund house completed five years this month.
The fund house has decided to give two units for every 500 units held by investors. Even if you hold less than 500 units, you will be given units proportionately. Termed as loyalty bonus, these units are somewhat similar to the bonus units that fund houses used to give to their unit holders earlier.
Though the trend of giving bonus units was initially started by public sector fund houses such as Canara Robeco Asset Management Co. Ltd, SBI Asset Management Co. Ltd and Unit Trust of India (now UTI Asset Management Co. Ltd), even private sector fund houses such as Kothari Pioneer Asset Management Co. Ltd (which was later acquired by Franklin Templeton Asset Management Co. Ltd) and Tata Asset Management Co. Ltd started issuing bonus units to investors in some of their schemes.
However, Fidelity’s bonus issue is different. Typically, when a fund issues bonus units, its NAV comes down as bonus units come out of the investors’ pocket. Either the fund house pays off bonus units or distributes cash as dividends.
The popularity of bonus units dwindled over a period of time, as investors became more aware that bonus units in mutual funds (MFs) don’t really work the way they work in shares where the price of an equity share—after falling after a bonus issue just like an MF bonus issue—could also increase if the market feels that the firm has good prospects. A fund’s NAV doesn’t increase in a similar fashion as it is merely a pass-through vehicle to invest in equity and debt markets; the price movement of an MF unit doesn’t get influenced by market sentiment. Here’s where FEF’s bonus issue is unique.
The fund house has dipped into its own reserves to pay the bonus units. It will pay for these bonus units, equivalent to the fund’s prevailing NAV on 18 May (Rs31.37). Eligible investors of FEF will continue to hold their existing units at the existing NAV as well as get two more units.
“Since Indian investors do not really invest from a long-term perspective, having completed five years in this fund and getting rewarded with bonus units would promote long-term investing,” says Ashu Suyash, chief executive office, Fidelity AMC.
However, if these bonus units are sold before a year, they will attract short-term capital gains at applicable income-tax rates. The tax will also be higher as the units are free of cost.
FEF is part of Mint50—Mint’s chosen set of 50 schemes. As per the fund’s latest available factsheet on its website, FEF returned 26% since inception as on 31 March.