MF Alert! Dividend options in mutual funds to get new name: Know how it will help investors

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Updated: Oct 06, 2020 3:04 PM

There are SEBI's guidelines in place that provides the accounting policies to be followed for determining distributable surplus.

Dividend options, growth plan, mutual funds, MF schemes, Direct Plan, Regular Plan,Based on the recommendations of Mutual Funds Advisory Committee, the regulator has decided to modify the nomenclature from April 1, 2021.

Whether one invests in the Direct Plan or the Regular Plan of a mutual fund scheme, there are two options to choose from. Based on one’s requirement, one can choose between the growth plan and the dividend plan. However, the dividend declared in MF schemes is different from the dividend declared and received from equity shares. It is wrong for an investor to treat the dividend declared by a company (which is out of profits) and the dividend declared in a mutual fund scheme to be similar.

Therefore, the regulator feels that there is a need to clearly communicate to the investor that, under the dividend option of a Mutual Fund Scheme, a certain portion of his capital (Equalization Reserve) can be distributed as dividend.

There are SEBI’s guidelines in place that provide the accounting policies to be followed for determining distributable surplus and accounting the sale and repurchase of units in the books of Mutual Funds.

The rules mandates that when units are sold, and the sale price (NAV) is higher than face value of the unit, a portion of sale price that represents realized gains shall be credited to an Equalization Reserve Account and which can be used to pay any dividend.

Based on the recommendations of the Mutual Funds Advisory Committee (MFAC), the regulator has decided to modify the nomenclature from April 1, 2021, as follows:

All the existing and proposed Schemes of Mutual Funds shall name / rename the Dividend option(s) in the following manner:

1. Dividend Payout: Payout of Income Distribution cum capital withdrawal option

2. Dividend Re-investment: Reinvestment of Income Distribution cum capital withdrawal option

3. Dividend Transfer Plan: Transfer of Income Distribution cum capital withdrawal plan

The Offer documents shall clearly disclose that the amounts can be distributed out of investors capital (Equalization Reserve), which is part of sale price that represents realized gains. Further, AMCs shall ensure that the said disclosure is made to the investor at the time of subscription of such options/plans.

The new nomenclature will help investors to clearly understand that a part of their capital is also getting withdrawn and it is not only the gains out of the scheme that are received. Growth option is suitable for long-term investors who invest in mutual fund schemes for long-term goals. Alternatively, one may opt for a systematic withdrawal plan (SWP) in debt MF schemes to meet one’s regular income needs.

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