What do mutual fund dividends mean?

As many as 12 mutual funds de clared dividends recently . Tradi tionally, the last quarter of the financial year is the dividend season, so investors can expect more funds doling out dividends in the coming months. But it is not necessarily something investors should get too excited about.

These dividends come from the funds’ NAV (net asset value) and are like redemptions.Suppose you hold 1,000 mutual fund units with an NAV of `20 and the fund house declares a dividend of `2 per share. Since the dividend is coming from the NAV , the NAV will fall by `2 to `18.

Even as you pocket `2,000, the value of your holding comes down to `18,000. Had you redeemed 10% of your holding, the results would have been same–you would have got `2,000 and your mutual fund holding would stand at `18,000.

Don’t get too excited about getting dividends from mutual funds. Treat them as redemptions instead

While regular dividends from a company shows that its prospects are good, regular dividends from mutual funds mean nothing.Mutual funds declare dividend to create a positive perception among investors. Indian investors often confuse MF dividends with company dividends and treat them as gain.mutual funds

Also, booking regular profit and distributing it as dividend in a rising market reduces the risk of equity schemes. In an overheated market, fund managers get into cash to reduce the impact of a correction. Now, the question is whether the same should be held as cash in the scheme or returned to investors as dividends? “Distributing money to investors when the fund house feels the market doesn’t offer worthwhile investment op tions is a good move,“ says Manoj Nagpal, CEO, Outlook Asia Capital.

Dividend is also useful for investors who need income from investments. “Some investors need regular income. For them, we try to declare dividend out of the profits booked during the year,“ says Sunil Singhania, CIO, Equity Investments, Reliance Mutual Fund.

Fund houses have also started declaring `large dividends’ to facilitate `dividend stripping’ for HNIs. The normal dividend yield in equity funds is 2-3%. A very high yield, above 15%, will cause a large fall in NAV . Investors who’ll redeem units at lower NAVs will book capital loss–thereby saving on tax. To stop the dividend stripping strategy , the government has inserted special rules in the Income Tax Act. Now, the loss will be recognised only if the investor has held the MF scheme for at least 3 months before dividend record date or nine months after dividend record date.

Can retail investors benefit when equity mutual funds declare large dividends? Yes.Since dividend from mutual fund is tax free, investors holding the scheme for more than three months can sell and book short-term capital loss and the same can be offset against other short-term capital gains. And even if you have bought these schemes only after the dividend declaration, you can sell them after nine months to book short-term capital loss.

Long-term investors need to decide whether they want to invest in equity mutual funds for generating a regular income or accumulating wealth. Accordingly, they need to choose between dividend and growth options.

If dividend is sole source of income, it is better such investors move out of equity funds altogether.

Source: Times of India 21 Dec’2015