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Business News/ Money / Calculators/  Trading of mutual fund units stops when dividends are declared
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Trading of mutual fund units stops when dividends are declared

There are two reasons why trading gets suspended

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On Monday, 3 August, ICICI Prudential Asset Management Co. Ltd suspended trading of units of one of its fixed maturity plans (FMP), ICICI Prudential FMP-Series 63-3 Years Plan M. This FMP matured last week, but such suspension can even happen in on-going FMPs. Late last month, this mutual fund (MF) scheme announced a dividend and 3 August was the record date. But why stop people from buying and selling units if the fund has to declare dividends?

CLOSING THE BOOK

Closed-end funds have to be mandatorily listed on stock exchanges, either the National Stock Exchange or the BSE Ltd. This rule was put in place in 2008 to enable investors to exit funds if they wanted to but couldn’t wait till the end of the tenor. But when closed-end funds declare dividends, you cannot buy or sell their units on the stock exchange for a few days during the dividend declaration period. When a scheme declares a dividend, it needs to find out which of its investors have opted for a dividend plan. There is a small time gap between when the fund house has a list of such investors and when it actually distributes dividends. With closed-end funds, this is more important as units are bought and sold throughout the day, although in reality, such funds don’t see much trading.

For units traded on a stock exchange’s MF platform, the two main depositories—National Securities Depository Ltd and Central Depository Services (India) Ltd—send regular information to all MFs’ registrar and transfer agents (such as Computer Age Management Services Pvt. Ltd and Karvy Computershare Pvt. Ltd). Called ‘benpos’, or beneficiary position, it gives information about the unit balance as on that day and the name of the unit holders.

TIME GAP

According to MF industry participants, there are two reasons why trading gets suspended. First, to find out which investors are eligible for dividends. This can take a few days. Second, on the stock exchange, sometimes transaction processing takes more than a day. So, even if a seller has sold her units to a buyer and the buyer is ideally eligible for dividends, it’s the seller whose name continues to figure in the MF’s books. In the interim, if a fund house’s record date has arrived but the investor list doesn’t get updated in time, the seller could get the dividend.

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Published: 03 Aug 2015, 07:45 PM IST
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