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Aarati Krishnan

THE game of using dividends to lure fresh funds from investors has started again. Over the past couple of months, a slew of equity-oriented funds have announced dividend payouts. In some cases, the record date for the dividend payout has been set well after the initial dividend announcement.

The Franklin India Bluechip Fund, for instance, announced a dividend payout on July 11, but set the record date for the dividend about three weeks later, on July 30. Alliance Capital went a step further, and has already announced that it would pay out dividends on its Basic Industries Fund and the Frontline Equity Fund, for those who are invested in the fund by the end of August 2003!

The substantial lag between the dividend announcement and its actual payout suggests that dividends are once again being held out as a bait for investors to enter equity funds.

Dividends are once again at the centre-stage of advertising campaigns from equity mutual funds seeking to woo fresh investors to buy into their schemes. HDFC Mutual Fund has, for instance, widely advertised the recent dividend declarations on the funds taken over just a couple of months back from the Zurich stables. The UTI's hoardings too highlight the slew of dividends declared by its equity funds.

It does not take a seasoned investor to know that dividend payouts do not add anything to the eventual returns from a fund. All the appreciation in the value of a fund's portfolio is reflected in its Net Asset Value and belongs to its unitholders. Whether the fund chooses to retain the appreciation or to distribute it to its unitholders, does not really make a difference to the investment returns.

What the dividend does is to ensure that a part of the gains are encashed and vested in the hands of investors. To that extent, there is protection from any downside in asset prices.

They may help investors in equity funds lock into good returns as and when they are available, by cashing in on part of the appreciation in the fund's holdings. From this viewpoint, equity funds, especially those that have earned a healthy appreciation over the past couple of months, cannot be faulted for declaring dividends.

Neither is there any justification for large time lags between the dividend announcement and the record date, nor for the funds' persistent use of dividends, rather than returns (capturing both dividends and NAV appreciation) to sell their wares.

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