AMCs to discontinue dividend reinvestment option

Amfi wants the practice to stop due to the growing number of complaints during withdrawals

With the tax-saving season under way, mutual funds (MFs) have started aggressively promoting their equity-linked savings schemes (ELSS). These get a benefit under the Section 80C limit of Rs 1.5 lakh.   

However, investors are to no longer get the dividend reinvestment option. The Association of Mutual Funds in India (Amfi) has written a letter to asset management companies (AMCs) to stop offering this option.  The reason: Rising complaints during withdrawals. Fund houses already have Rs 36,257 crore in ELSS.

The letter says investors often forget to tick the ‘Dividend payout sub-option’, resulting in reinvestment of the dividend by default. Since the original amount invested qualifies for deduction under section 80C, even though the dividend reinvested does not qualify for any such deduction, the lock-in period rule is often misconstrued by investors, who expect to withdraw the entire balance of units (including dividend reinvested) at the time of redemption, after a three-year lock-in period of the original investment. Which they cannot do, due to lock-in of each transaction of dividend re-investment, leading to investor grievances,” says the letter.  MFs have been providing a growth option and dividend option under ELSS products, including a 'Dividend reinvestment sub-option', wherein the dividend amount reinvested is also subject to a lock-in of three years from the date of reinvestment.

The decision was arrived at after a meeting between the market regulator, the Securities and Exchange Board of India, and Amfi. The matter was also examined by the Amfi Committee on Operations and Compliance, which has recommended that the dividend reinvestment sub-option under ELSS products be withdrawn, to avoid any confusion among investors.

For existing investors, it means the dividend reinvestment option will be converted to dividend payout. An investor not wanting to receive the dividend can take the dividend transfer plan, whereby the dividend amount could be reinvested in any other open-ended scheme of the MF house. According to sources, some AMCs have already started implementing it.