In order to increase transparency and stop mis-selling in the mutual fund industry, market regulator Securities & Exchange Board of India (Sebi) has sent letters to all fund houses to declare dividends in rupees and not in percentage terms with immediate effect.
According to market participants, this move will reduce mis-selling as many fund houses are known to advertise huge dividends in percentage terms to attract new investors into the equity-oriented schemes. This step from Sebi is expected to bring more clarity to investors and help them take informed decisions. ?In order to bring greater precision and clarity in dividend distribution, you are directed to declare and disclose dividend only in the form of rupees per unit in advertisements and all other communications such as half yearly portfolio disclosures, annual reports, etc to investors in this regard,? Sebi?s letter to fund houses said on Wednesday.
Unlike the dividend declared by a company to its shareholders, dividends paid in percentage by mutual funds have little significance since they have to be compared with that of NAV to arrive at dividend payout, according to experts. Dividend has to be paid only of the gains realised, and after payment of dividends, the NAV reduces to the extent of dividend distributed.
Sebi is probably concerned that an existing fund with higher NAV (of say Rs 50) might declare in advertisements that it is giving hefty dividends (of say 100%), which in effect might only mean a smaller dividend payout (of 20% in this case). Declaring dividends in rupees will do away with the confusion. Vikaas Sachdeva, country head-business development at Bharti AXA Mutual Fund, said, ?It will be business as usual. Now we have to say we are giving Rs 4 or Rs 5 as dividend rather then 40% or 50%.?