Don't get lured by MF schemes' dividends

When Vidhyut Sampath asked his mutual fund distributor for schemes in which he can invest, he was advised two equity-linked savings schemes. When he asked the reason, the agent said these would soon declare dividends. It was almost as if the scheme was giving a bonus to investors. But the reality is far from it.

Like Sampath, many investors are lured with dividends that mutual funds pay, without realising that they are getting their own money back. Hemant Rustagi, CEO, Wiseinvest Advisors, said it was not just gullible investors that get swayed by dividends; even well-informed investors prefer to put their money in schemes that have regularly paid dividends. “Investors tend to think that funds that declare dividends often are better-performing funds and that is the reason for regular payouts,” said Rustagi.

There is a world of difference between dividend declared by companies on their shares and mutual funds on their units. When a company declares dividend, it digs into its coffers to pay investors. For instance, on Thursay, Siemens declared a dividend of Rs 5 per equity share that has a face value of Rs 2. This means an investor will get Rs 5 extra for each share of Siemens.

But when a mutual fund declares a dividend, it gives a part of investors’ money back to them. For example, a fund with a net asset value (NAV) of Rs 100 declares 50 per cent (of the face value of the unit, that is, Rs 10) dividend. The fund manager will take away Rs 5 from the NAV, which will come down to Rs 95.

Mutual funds, on the other hand, also declare dividends to attract fresh inflows into their schemes. Recently, Reliance Vision Fund and Reliance Growth Fund declared a dividend of 50 per cent (or Rs 5) on a face value of Rs 10. Other funds that have declared high dividends recently include SBI Magnum Multiplier Plus (70 per cent) and Birla SL Advantage Fund (75 per cent).

In other words, while these numbers look very impressive, the fact is that they are paying investors from their own funds. And, these dividends make little sense for investors who save for the long term and want to create wealth.

Dividend is essentially meant for investors who are looking for regular income. These include retirees, who should look at debt or monthly income plans.

Also, choosing for the dividend options in tax saving schemes or equity-linked savings schemes make sense because there is a lock-in period of three years in these schemes.

But if an investor has opted for a dividend plan already, he should make a plan to use that money in the best possible way.

One can look at creating a debt portfolio with the dividend. “Just don’t opt for dividends to get some money back. Instead, plough back the money into other schemes so that a portfolio can be created,” said a certified financial planner.