In a move aimed at increasing transparency among mutual funds, the Securities and Exchange Board of India (Sebi) has in a recent directive asked mutual funds to distribute dividends out of realised gains only, and not out of unit premium reserve.
What does this mean? Imagine that the face value of a fund is Rs 10, and over time its NAV rises to Rs 50. The Rs 40 (the gain in NAV) is the unit premium reserve.
Earlier, fund houses would pay dividends out of the unit premium reserve. In effect, they were ‘rewarding’ investors by paying them out of their purchase price itself.
Now Sebi has stipulated that mutual funds must pay dividends out of realised gains (money made by the funds from the sale of the shares held by it).
Earlier, fund houses were using dividend declarations as a sales ploy (effectively saying, “Invest in our fund because we declare higher dividends and we declare them more often.”)
If Sebi is able to implement this ruling tightly, fund houses will increasingly find it difficult to declare high rates of dividends, or to declare dividends frequently.
Two, in the same circular (dated March 15) Sebi has issued a directive regarding the fee charged by no-load funds. Earlier, when you had schemes that charged an entry load and others that were no-load, the no-load schemes were allowed to charge an additional management fee of 25 basis points. Since Sebi’s August 2009 all funds have become no-load. Sebi has now asked no-load funds to stop charging the additional 25 basis points as fee.
Three, earlier open-ended fund could have an NFO period of up to 30 days while close-ended funds could have an NFO period of up to 45 days. Now Sebi has reduced the NFO period for all funds (the sole exception being ELSS funds) to 15 days. Effectively this means that fund houses have less time to garner funds during an NFO and will have to work harder.
Four, earlier a fund housing launching fund-of funds would get some commission from the underlying scheme. Now Sebi has stipulated that any commission or brokerage which the Indian fund house issuing the fund-of-funds receives must be added to the scheme’s account.
And finally, any brokerage or commission paid to the fund’s sponsor, its associates or related people must be disclosed in the fund house’s half-yearly report.
Source: http://new.valueresearchonline.com/story/h2_storyview.asp?str=101308
What does this mean? Imagine that the face value of a fund is Rs 10, and over time its NAV rises to Rs 50. The Rs 40 (the gain in NAV) is the unit premium reserve.
Earlier, fund houses would pay dividends out of the unit premium reserve. In effect, they were ‘rewarding’ investors by paying them out of their purchase price itself.
Now Sebi has stipulated that mutual funds must pay dividends out of realised gains (money made by the funds from the sale of the shares held by it).
Earlier, fund houses were using dividend declarations as a sales ploy (effectively saying, “Invest in our fund because we declare higher dividends and we declare them more often.”)
If Sebi is able to implement this ruling tightly, fund houses will increasingly find it difficult to declare high rates of dividends, or to declare dividends frequently.
Two, in the same circular (dated March 15) Sebi has issued a directive regarding the fee charged by no-load funds. Earlier, when you had schemes that charged an entry load and others that were no-load, the no-load schemes were allowed to charge an additional management fee of 25 basis points. Since Sebi’s August 2009 all funds have become no-load. Sebi has now asked no-load funds to stop charging the additional 25 basis points as fee.
Three, earlier open-ended fund could have an NFO period of up to 30 days while close-ended funds could have an NFO period of up to 45 days. Now Sebi has reduced the NFO period for all funds (the sole exception being ELSS funds) to 15 days. Effectively this means that fund houses have less time to garner funds during an NFO and will have to work harder.
Four, earlier a fund housing launching fund-of funds would get some commission from the underlying scheme. Now Sebi has stipulated that any commission or brokerage which the Indian fund house issuing the fund-of-funds receives must be added to the scheme’s account.
And finally, any brokerage or commission paid to the fund’s sponsor, its associates or related people must be disclosed in the fund house’s half-yearly report.
Source: http://new.valueresearchonline.com/story/h2_storyview.asp?str=101308
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