MFs announce dividends of 20-60 percent

By siliconindia   |   Tuesday, June 30, 2009   |    6 Comments
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MUMBAI: To encourage investors to invest in existing schemes, equity mutual funds are handing out dividends to investors like never before. Fund houses such as Franklin Templeton, SBI Mutual, HDFC MF, Reliance MF, Tata MF and UTI have announced to give dividends of 20-60 percent. The fund manager of joint venture (between Indian and foreign entities) mutual fund house says, "One of the reasons for handing out large dividends is to keep retail investors in good spirits." More than anything else, the near-80 percent market rise over the past four months has helped mutual funds to distribute surplus profits. Fund houses have seen phenomenal assets under management (AUM) growth over the past six months. Even smaller fund houses, including Baroda Pioneer AMC, DBS Chola, Taurus Mutual Fund, Canara Robecco and Religare MF have seen a decent appreciation in their AUM during this period. Saurabh Nanavati, CEO, Religare Mutual Fund says, "Retail investors, especially elderly investors expect dividend payouts periodically but fund houses could not pay dividends last year as a result of the market downturn. The market rise, this year, has yielded surplus profits that are now being distributed to the investors." With not having many investment opportunities in this overheated market, conventional fund management wisdom makes it imperative for fund managers to declare dividends as this is one of the few ways to take profits off the table. Mutual funds pay dividends out of the surpluses (gains) they generate over a fixed period, say six months to one year. Sukumar Rajah, CIO-equity, Franklin Templeton Investments says, "Dividend is only one of the evaluation parameters to be considered when investing in equity funds-focus being on consistency in dividend payout rather than the quantum of payout. Typically, equity funds, which have a long-established track record and have built up strong surpluses, are able to give consistent dividends through market cycles." The effect of dividend payout is that the fund size reduces by the amount of money distributed. This is also reflected in the decline in net asset value. The large dividend pay-out has once again popped the most fundamental question with respect to mutual fund investments: Growth or dividend fund, which is better? Fund managers say growth option is for investors who have long-term investment horizon while dividend schemes are for investors who look for periodic income from their investments.
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