In a bid to woo investors, mutual funds have embarked on a dividend declaration spree. Over a dozen fund houses, large and small, including Reliance, UTI, ICICI Prudential, SBI, Tata Mutual Fund, DSP BlackRock, Religare, Bharti Axa, Taurus, are doling out dividends in the range of 10-50 per cent.
At a time when new incremental inflows are not coming in, dividend declaration works as a mechanism to attract more investors and fresh inflows, said Mr Krishnan Sitaram, Head of Fund Services, CRISIL.
In the run up to the tax planning season, tax-free funds are seen declaring dividends to lure investors. It is easier for distributors also to sell the product on the back of such an incentive (such as a dividend declaration).
Fresh inflows into equity funds have fallen by more than 50 per cent as on October-end, compared with the July-end numbers. According to industry body AMFI’s figures, investments into equity funds were at Rs 4,261 crore in October as against Rs 8,737 crore in July. The benchmark index Sensex has gone up by over 13 per cent since July.
Declaring dividends works as a goodwill gesture and also works as a tool to attract more money from new investors, said Mr Rakesh Goyal, Senior Vice-President, Bonanza Portfolio.
Typically, when the equity market goes up there is value appreciation in the equity schemes. Hence, fund houses give dividends to reward investors, said Mr Srinivas Jain, Chief Marketing Officer, SBI Mutual Fund.
Mr K. Venkitesh, Head of Distribution of Geojit Financial Services, agrees, “Dividend declaration is more of a selling tactic as it gives immediate returns, although the NAV of the mutual fund scheme falls after dividend is declared.”
Unlike the way corporate houses pay dividends, mutual funds simply sell off part of the funds assets to pay dividends. So on the record date of the dividend, the NAV of the fund drops and also the worth of the investor’s investments decreases to that extent, explained an analyst.
According to Mr Krishnan, dividend is not re-invested in the corpus of the scheme, and to that extent it is not a positive for the long-term investor who would have rather waited to gain on that re-invested amount also.
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