MFs rush to declare dividends3 min read . Updated: 29 Jul 2009, 09:55 PM IST
MFs rush to declare dividends
MFs rush to declare dividends
Mumbai: After a flurry of new fund offers (NFOs) in the past two months, fund houses have shifted strategy and are now wooing investors to put in money in existing funds by declaring dividends.
The move is prompted by a desire to collect money at the expense of investors for a few more days—till 31 July. Capital markets regulator Securities and Exchange Board of India (Sebi) has scrapped the entry fee on mutual funds from 1 August. All inflows till Friday are subject to a 2.25% entry load, which is passed on to distributors. An entry load is a price which an investor pays to buy a mutual fund unit.
Over the past week, at least 10 equity schemes have declared dividends with 30 and 31 July as record dates.
A record date is the date on which a fund looks at its records to check the list of investors eligible for dividend payment. By announcing dividends and keeping the record dates on 30 and 31 July, these funds want to ensure that new investors come in before the end of this month.
Funds that have announced dividends include two from Birla Sun Life Mutual Fund and one each from Baroda Pioneer Asset Management Co. Ltd, UTI Asset Management Co. Ltd, ING Investment Management (India) Pvt. Ltd, Sundaram BNP Paribas Asset Management Co. Ltd, Tata Asset Management Ltd, Taurus Asset Management Co. Ltd, Sahara Asset Management Co. Pvt. Ltd and SBI Funds Management Pvt. Ltd.
Reliance Capital Asset Management Ltd, Escorts Asset Management Ltd, Principal PNB Asset Management Co. Pvt. Ltd, Franklin Templeton Asset Management (India) Pvt. Ltd, IDFC Asset Management Co. Pvt. Ltd and DSP BlackRock Investment Managers Pvt. Ltd also have declared dividends with record dates on or after 24 July.
Sebi norms require an asset management company to issue a notice communicating the decision to distribute dividends within a day of its trustees taking the decision. And the record date should be five days from the notice date.
The rush started soon after a Sebi circular in early July. Around 30 schemes have declared dividends since.
Amar Pandit, chief executive officer of Mumbai-based My Financial Advisor, said: “This (dividend declaration) could be a good bait to bring (in) investors to the existing schemes. Distributors use these declarations to woo investors focusing on the cash inflow without explaining to them the actual implications."
Pandit advises investors not to buy funds based on dividend payouts alone and instead focus on long-term capital appreciation. In the past fortnight, 20 equity schemes from different fund houses have declared dividends from 15-40%, Sahara MF offering the highest: 40%. July has seen the highest number of dividend declarations this year, by 27 schemes, against only 30 schemes from January to May.
The promise of dividends helps distributors who can dangle the bait of immediate cash returns to woo investors. Experts dub this as “gross misselling". When a fund pays 40% dividend, for instance, its net asset value drops from Rs10 to Rs6. So investors get back part of the principal amount invested in the form of dividend, with no value addition by the fund house.
Fund managers, however, justify the dividend spree, citing the recent rally in the equity market. Saurabh Nanavati, CEO, Religare Asset Management Co. Pvt. Ltd, said: “These funds have realizable surplus which they want to share with the investors. Sebi rules are strict enough to dissuade people from misusing the dividend declarations."
Sanjay Sinha, CEO, DBS Cholamandalam Asset Management Ltd, said: “There is always some excitement (among distributors) with the dividend payment. But we should also take into account the market conditions."