It is raining dividends for investors of equity mutual fund (MF) schemes. With the stock markets surging more than 10 per cent in July-August, several fund houses have chosen to distribute the gains to investors by paying dividends. Nearly a dozen equity MF schemes—from large-cap, multi-cap to ELSS (equity linked savings schemes) categories—are paying dividends to investors now.
This comes on the back of a slew of payouts over the past one month. As many as 20 equity MF schemes had paid dividends during this timeframe. MF schemes that had either paid or are in the process of doing so have seen a sharp gain in their net asset values (NAVs) during the last six months. Most schemes have seen a more than 20 per cent appreciation in their NAVs, while some have even recorded gains of 30-43 per cent over the period.
“Markets had rallied sharply. So, asset management companies have distributable surplus to pay dividends,” says Kaustubh Belapurkar, director, fund research, Morningstar Investment Adviser India. “Since NAVs have seen a good increase, we are redistributing realised gains to investors,” says a senior official with a top fund house.
The uncertainty over the pace and sustainability of the market rally due to the raging COVID-19 pandemic has pushed fund managers to book profits and pay dividends to investors, industry officials and experts says. Since regular dividend payment also acts as a performance parameter on which fund managers of these schemes are judged, asset management companies distribute profits whenever they are available.
“They (fund managers) are consolidating the gains and giving it back to investors in the form of dividends,” says Suresh Sadagopan, founder, Ladder7 Financial Advisories. Incidentally, most of the 20-odd schemes that announced dividends over the last one month have made the payouts to investors just ahead of the steep fall in markets.
Taxation attractive for lower slabs
Though the dividend option in equity MFs has become unattractive after the tweak in tax rates in the union budget 2020, lower income groups still invest in these schemes, as the tax outgo is much lower for them than before, say industry officials and advisors.
Dividends in equity MFs are now taxable in the hands of investors at their slabs. After the union budget 2020 abolished the dividend distribution tax (DDT) on dividends declared by MFs, those in the 30 per cent tax bracket will have to pay tax at that slab, while someone in the 5 per cent tax bucket will have to pay 5 per cent on MF dividends (both equity and debt), excluding surcharge and cess. This is applicable for 2020-21.
Earlier, equity MF dividends faced a DDT of 11.65 per cent, including surcharge and cess, while debt MF dividends were charged 29.12 per cent, including surcharge and cess. In addition to this, MFs will have to deduct a tax at source (TDS) of 10 per cent before distributing dividends in excess of Rs 5000 now.
Several equity funds used to offer high dividends even if the market conditions were bad, just to lure investors. This prompted market regulator SEBI to stipulate in 2010 that dividends should be given only from actual realised gains and not from the unit premium reserve. This had a sobering effect on pay-outs, with fund houses either stopping or offering lower dividends when the market conditions turned bad.
Dividends had dried up between 2010 and 2014, as the markets remained tepid. Several schemes did not pay dividends during this timeframe because they did not have enough incremental profits. The last three months of the financial year are the busiest period for dividend payments in the MF industry, as investors typically rush to buy ELSS products to save tax on time and earn some money through the pay-outs.(The writer is a freelancer)