Some Asset Management Companies (AMCs) offer the same percentage of dividend every month on investments made in a few Mutual Fund (MF) schemes to make the schemes look like regular income instruments as also to make them attractive.
The concept works well during the period of rising market and growing economy. But during an economic slowdown, for companies having portfolios of the schemes having little surplus to distribute, paying regular dividends may result in the erosion of the capital invested.
Take the example of Kishan Biswal (name changed), who retired from a PSU about 10 years ago and invested part of his retirement corpus in one such fund after the employees of the bank, in which he had fixed deposits (FDs), convinced him to do so for a better monthly return.
While Kishan was happy with the amount of dividend he received every month, but after a few years, he found that the capital invested had been eroded by a few lakhs. Now, he wants to shift the corpus to another investment option, where the capital will remain protected.
To help investors like Kishan to make an informed decision before investing in a scheme that offers regular monthly dividend, market regulator Securities and Exchange Board of India (SEBI) wants a review of dividend option(s) / plan(s) in case of MF schemes.
Stressing on the need of renaming such Schemes, SEBI said, “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.”
Accordingly, the SEBI wants the Dividend Payout option/plan to be renamed as Payout of Income Distribution cum capital withdrawal option, the Dividend Re-investment option/plan as Reinvestment of Income Distribution cum capital withdrawal option and the Dividend Transfer Plan as Transfer of Income Distribution cum capital withdrawal plan.
“A lot of investors opt for dividend options under the assumption that it is part of profits. New name will explicitly tell them that they are also withdrawing part of their capital,” said Ajay Sharma, Director & Designated Partner, InvestmentMitra Advisors LLP.
The market regulator has also instructed that the AMCs should clearly disclose in offer documents as well as at the time of subscription that the amounts can be distributed out of investors capital (Equalization Reserve), which is part of the sale price that represents realised gains.
The Consolidated Account Statement provided to investors should also disclose a clear segregation between income distribution (appreciation on NAV) and capital distribution (Equalization Reserve), whenever distributable surplus is distributed.
As tax treatments on distribution of surplus and capital are different, Sharma said, “With new name we also expect CBDT (Central Board of Direct Taxes) to review taxation structure on this option. And it should help investors save on taxes.”
“Overall it will help investors choose the right option,” Sharma further said.
