SBI Mutual Fund declares exchange traded fund dividends to help EPFO1 min read . Updated: 31 Mar 2021, 04:41 PM IST
- However, this action of the fund house has left retail investors with a tax bill as dividends are taxed at slab rate
SBI Mutual Fund has declared dividends on its Nifty and Sensex ETFs (exchange traded funds) cumulatively to the tune of 2.5% of their NAV (net asset value) in February and March 2021. In absolute terms, this works out to around Rs3,400 crore on a combined assets size of Rs137,533 crore of its two ETFs. According to a person with knowledge of the matter, the dividends were declared to enable the Employees’ Provident Fund Organization (EPFO) to realize some gains and pay out subscribers. Institutions account for 90-95% of the AUM of the schemes, the person explained. Dividends have not been declared in the retail investor dominated schemes like the ELSS fund, he added, in order to protect investor interest. However, this action of the fund house has left retail investors with a tax bill. Dividends are taxed at slab rate.
Actively managed mutual funds have growth and dividend plans where investors can choose whether or not they want dividends. This allows investors to select the time and extent of profit booking, through the growth plan (which has no dividends). Such investors can realize gains by simply selling the mutual fund units. ETFs do not have separate growth and dividend plans and hence as an industry practice, ETFs do not declare dividends.
“This is probably the first instance of a manager inducing a tracking error," said Anubhav Srivastava, partner and fund manager, Infinity Alternatives. Tracking error is the variance between the NAV of an ETF and that of the benchmark it is tracking (for example the Nifty 50 index). An efficient ETF will seek to minimize tracking error. “This has been done to favour the EPFO at the cost of all other investors who now have a tax incidence that, too, at a higher rate," Srivastava added. He explained that EPFO accounting policies forced a declaration of dividend by SBI MF. According to him, if EPFO were to book gains by selling ETF units, the amount realized would be considered as part principal repayment and part gains. However EPFO rules require the organization to invest 15% of incremental flows in equities. Hence a return of money in the form of principal repayment would cause the EPFO to fall short of this 15% requirement.