The Hindu Business Line : All dullsville

The year so far has been a disappointing one for mutual fund investors, expecting dividends on their units. Come the first quarter of the calendar and year mutual funds, especially tax-saving funds generally use hefty dividends as a ploy to attract investors to the schemes. But this year, they have been shying away from such payouts.

In the first quarter of 2009 (up to third week of March), however, only 17 schemes declared dividends. This number stood at 69 in the first quarter of 2008 and at 61 over a similar period in 2007.

This is the case with ELSS funds too, with only four funds declaring dividends till date in 2009, against 15 funds over the first three months of 2008. This bleak dividend scenario can be attributed to the market fall and the non-availability of distributable surplus. In any scheme, whenever the NAV is quoting above its face value it is presumed that there is some amount of distributable surplus.

Typically, funds launched in the late 1990s or early 2000 may still be sitting on surplus or, in other words, quoting above their face value. However, many equity funds launched in the last three years have slipped in to negative returns since their launch, or are quoting close to their face value of Rs 10. These funds may be unsure of meeting dividend commitments giving the risk of capital erosion. Further, the high daily volatility in the market may make it difficult for them to decide on the quantum of dividend and setting aside five clear working days for the record date.

For instance, the NAV per unit of seven out of 35 ELS schemes are quoting above par and the rest are all way below their face value. Only four of the above seven schemes have declared dividends.

Investors need to keep in mind that they cannot rely on dividend from mutual funds as a regular source of income. Mutual funds, at their discretion, may choose to declare dividends or allow it to grow. For conservative investors, dividend payout option may be one way to cash out on profits in the fund. In case a fund with high returns has not been declaring dividends, investors may opt to sell a part of their units to periodically encash profits.

Such a strategy would prevent paper profits from melting away, the way they have over the past 15 months.

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