Fund dividends - picking your own pocket

A mutual fund dividend payout is just taking your own money and giving it back to you

A spate of advertisements by fund houses about dividend payouts from various schemes has been enriching the print media of late. How do you use the dividends in a mutual fund at all? You have a corpus NAV, which gets reduced not only by the dividend payout but also by the amount of dividend distribution tax that is paid to the government of India. Unlike a business entity dividend, the mutual fund dividend is eyewash and is of use only to some tax avoidance or evasion entities.
It is no sign of prosperity of the mutual fund. Dividend option is good for those who seek tax-free income in the short term. In equity mutual funds, if your holding period is beyond one year, then any gain on sale of mutual fund units is tax-free to the investor. In such a case, why opt for dividend and then suffer the payout to the government of India?

The corporate sector uses the dividend option in liquid funds, because of tax arbitrage. Even with the dividend distribution taxes, they still make some extra money in the short term. For an individual also, a daily dividend scheme in a liquid fund does make some sense.

When the new Direct Taxes Code comes in, probably we would have to search for new loopholes.

However, when it comes to equity schemes, a dividend payout helps only someone who wants to indulge in ‘dividend stripping’. For this to happen, one has to be holding the units either three months before the dividend date or for nine months after the dividend payout. Let us assume that the pre-dividend net asset value (NAV) of a scheme is Rs20 and that there is a dividend of Rs4. Once the dividend is paid out, the NAV will decline to say around Rs15.12 (Rs4 for the dividend and 88 paise as the dividend distribution tax to the government). After a year, let us assume that the NAV has not moved at all. In this case, you have a ‘loss’ of Rs4.88 when you sell the units which can be offset against short-term gains. Of course, you have taken away Rs4 as dividend, which is like agriculture income, i.e., tax-free! A lot of HNIs use this route and many fund houses discreetly market the dividend payout three to four months in advance. Of course, it is illegal to announce dividend intentions so early, but who the hell cares about the law? Many schemes, if analysed, show healthy inflows around three to four months before the dividend payout.

A mutual fund dividend is taking your own money and giving it back to you. In the process, the dividend distribution tax chips away at some of your asset value. This distribution tax is not applicable if you are a non-taxable entity like a charitable organisation.

As a retail investor, stay put in the growth option. You will be better off. Whenever the fund pays a dividend, the NAV drops by the dividend payout plus the dividend distribution tax.

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    9 years ago

    do not think more ang more and awit
    futures of mutual funds investments.wait and watch


    10 years ago

    Frame Dependence is a reality in behavioural finance wherein an investor will treat money in his left pocket differently from the money in his right pocket. Your arguments are all valid in a frictionless traditional finance model. In real life however, individuals will have biases including that of Self-control and Regret Avoidance. Those who are ageing will want to consume only at a rate that keeps their perceived wealth intact and use away dividend incomes to restrain expending beyond a rate that causes them to superannuate. Howsoever logical it may be to own the growth schemes and sell proportions of that to meet expenses, it is a difficult thing to do for individuals who are all made differently by the Almightly. Behavioural biases is what makes two different sets of value at the same price causing markets to trade, investments to become possible and this column to be a necessary and required reading.

    Ian Hude

    1 decade ago

    All this is true but in the growth option one reduces the number of units when one does a cash out ( as also in a dividend option cash out between dividends).
    But in the dividend option the NAV rises with the market also and the number of units undiminished is a benefit in that event.

    [email protected]

    1 decade ago

    IT IS TRUE THATDIVIDEND PAYOUT IN MUTUAL FUNDS comes from investors own pocket,but it cheers the.and think as pention to fulfill their needs.if share market goes down the pay out is benficial. in my opinion one should take payout to fulfill his small requirments.ONLY those who have no need money.can take growth option.

    Experian gets RBI nod to operate credit bureau in India

    Experian's Indian JV with seven other institutions has received the clearance from the RBI to operate a credit bureau in the country

    On Thursday, global information services firm Experian said that its Indian joint venture has received the clearance from the Reserve Bank of India to operate a credit bureau in the country, reports PTI.

    This approval will enable the company to offer services to enhance credit granting processes and portfolio management to its customers, the company said in a press release.

    Experian had formed the Indian credit information company last year with seven other institutions including Punjab National Bank, Union Bank of India, Sundaram Finance and Magma Fincorp, amongst others.

    "This creates a platform for us to introduce a wide range of new products and services to help India's growing financial services and telecommunication sectors to acquire and retain profitable customers," said Experian chairman, TS Narayanasami.

    Experian has appointed Phil Nolan as the managing director of the Indian credit bureau, which will operate from Mumbai.

    A credit information bureau provides comprehensive credit information—details pertaining to credit facilities as well as the payment track record of borrowers.

    With this approval, Experian will become the second credit bureau in the country after Credit Information Bureau (India) Ltd (CIBIL), which was incorporated in 2000.

    Globally, Experian has operations in 65 countries. It provides services to customers to manage their credit risk, prevent fraud, target marketing offers and automate decision making.

    The company also offers services to individuals to check their credit report & credit score and provides protection against identity theft.

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    70% of Interlink Petroleum held in physical form; will help price-riggers

    The bulk of Interlink’s shares are in physical form even as market punters peddle rumours about its oil find. This will help price-riggers

    At a time when dealing in the securities market is becoming more technologically driven, Interlink Petroleum Ltd, a company engaged in exploration and production of oil & gas, still holds 70% of its shares in physical form. Out of the total 18.4 million outstanding shares as on December 2009, the company has still not dematerialised around 12.9 million or about 70% of its shares. As of end-December, Interlink has only 5.48 million shares in dematerialised form.

    Meanwhile, an assortment of interested parties and market punters are talking about the company getting closer to discovering oil. Large physical shares and market rumours are a recipe for price-rigging. Interlink promoters held 61.39% stake in the company as on December 2009. 

    In order to eliminate the risks associated with trading in physical securities like delay in transfer, bad delivery, theft, fake and forged shares, market regulator Securities and Exchange Board of India (SEBI) in 1998 had introduced electronic book transfer of share certificates. It also introduced selling of shares in smaller quantities of 500 units or for an amount of Rs25,000 to help investors to liquidate their holdings easily.

    According to some experts, since Interlink was listed on the Bombay Stock Exchange in 1994, the SEBI orders on demat may not be applicable to the company, or the company may not fall under the regulator’s policy reforms initiated in 1998.

    This raises another question, has the time come to bring the companies listed before 1998 under the new reforms? Reportedly, for Interlink, the minimum lot size of 100 shares is available only in demat form forcing small investors who wish to buy less shares to take the delivery in physical form.

    Interlink officials were not immediately available for comments.

    “Earlier the population of depository participant (DP) account-holders was less. Post the 2005 rally, many people started opening DP accounts. It (Interlink) is not a fancy stock. There are many companies which hold a majority of their shares in physical form. It takes two-three months to dematerialise stocks, which makes it a tedious process. It is surprising to know that majority of Interlink’s shares are held in physical form,” said Chandrashekhar Layane, vice president, Fair Wealth Financial Services.

    “Sometimes, shareholders don’t wish to convert their shares into demat form because of the high charges associated with this process,” said an analyst with a leading brokerage firm.

    Dematerialisation of shares ensures faster payment on sale of shares, no stamp duty is paid on transfer of shares and there is no fear of loss, theft, mutilation or forgery of share certificates.

    “All new public issues which have an issue size of Rs10 crore and more have to be issued in demat form. SEBI doesn’t say that all shares should be held in demat form. An individual can choose to have shares in physical form,” said a top official from an exchange.

    Interlink stock trades in a ‘T Group’ category on the Bombay Stock Exchange (BSE) and closed at Rs35.15 in the last trading session. The company has been incurring net losses since December 2007. It posted a net loss of Rs0.15 crore in the December quarter of 2007, Rs0.63 crore in December 2008 and a net loss of Rs10,000 for the December quarter ended 2009.

    In its announcement to the BSE on 16th February, Interlink said that it is allotting a preferential issue of 6.5 million shares at Rs23 each to non-promoter foreign companies which would increase its share capital to Rs30 crore from Rs19 crore.

    Despite a majority of its shares being in physical form, Hemant K Gupta, a private investor, had recommended buying the stock in an article in a market tip-sheet called Informed Investor.

    According to Mr Gupta, IPL’s market capitalisation is just Rs66 crore as against the Rs4,200 crore market capitalisation of Hindustan Oil Exploration (HOEL).

    Mr Gupta argues, “IPL has rights to develop two oil fields in Gujarat. It has been bought over by JIT SUN of Singapore, an investment arm of Zurong Group.

    (The) new promoters are a well-known group in oil asset management and have clients like Exxon and Chevron in (the) West and China Petroleum in the East. Oil fields of IPL are adjacent to HOEC and have potential of 12,000 BOPD from each block which will be significantly higher than HOEL.” Well, this may come true. But what will certainly help him and the promoters is the fact that there are few demat shares of Interlink.

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    Pratap Kumar Panda

    1 decade ago

    While admitting the fact that theIPL shares are worth buying looking its prospects,what precautions are tobe taken for buying into this share?


    1 decade ago

    What do you expect from the finance minister on Thursday?

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