When your monthly income doesn?t land up on time, it?s cause for some heartburn. And that is what has happened for some investors in Monthly Income Plans (MIP) in recent months, with some fund houses skipping dividend payments, and some others paying less.
A combination of factors has led to MIPs missing their dividend payment cycles, first in March and then in July. Equity markets have been volatile this year with Sensex giving a negative return in January and May. MIPs, which are hybrid schemes typically investing 10-25% in stocks and the rest in debt took a beating, with NAVs eroding. Besides, fund managers find their hands tied with the latest Sebi rules barring fund houses from paying dividends from their unit premium reserve. Mutual funds can pay dividends only out of their realised gains now, making it tough for fund managers to keep a ?consistent? dividend track record.
According to Value Research, Templeton India Low Duration, ICICI Prudential MIP, ICICI Prudential MIP 25 Reg, Birla Sun Life MIP II Wealth 25, MIP II Saving 5 and Bharti AXA Reg Return have skipped dividends in March or July. A Balasubramanian, CEO of Birla Sun life Mutual Fund said: ?In March, there was ambiguity regarding the new guidelines. So, we skipped giving dividends in March but in April, we gave double dividends to unit-holders.? NAVs of some MIP funds were also languishing near face value levels, indicating they have little leeway to pay dividends from historical returns. In February, Birla MIP II Wealth 25 had given 0.46% dividend as compared to 1.02% in April. Similarly, MIP II Saving 5 paid 1.05% dividend in April as against 0.46% in February.
However, it?s not the first time the cycle has broken. It happened in March 2009 as well, just before the start of the strong bull rally. After every sharp fall in the equity market, some MIP funds have skipped dividends.
Of course, fund managers often attempt to smoothen dividend payments by ?buffering?. This is done by not paying all returns earned for the month in the form of dividends. Higher returns of one good month, for instance, are saved for the bad months. Earlier, some also resorted to dipping into unit premium reserve, to keep the dividend track record intact. But Sebi has shut that door as well.
Currently, MIPs have over Rs 22,000 crore of assets under management. Says Mahendra Jajoo, head of fixed income at Pramerica Mutual Fund: ?MIPs are suitable for investors looking at a horizon of 12-24 months, as they provide them with asset allocation and moderate risk exposure.? Often, to avoid such instances of dividends skipped, experts advise investors to go for systematic withdrawal plans on these schemes instead of dividend options, which is also a tax-effective way of investing.
