Market turmoil hits ELS schemes

Only 8 out of 48 schemes pay dividends.

Uncertain market conditions have taken a heavy toll on dividend payouts by equity linked saving schemes (ELS schemes). Only seven out of 36 open-ended schemes and 1 out of 12 close-ended schemes have declared dividends in 2008-09.

An ELSS invests 80 per cent or more of its investible corpus in equities and the rest in debt or money market instruments. Investors park their money in these schemes as they get tax benefits under Section 80C of the Income Tax Act.

Among the schemes that announced dividends, Birla SunLife Tax Relief 96 and HDFC Tax Saver paid the maximum at 50 per cent each. Others such as Franklin Templeton Tax Shield, Taurus Tax Shield and HDFC Long-Term Advantage have paid in the range of 30-35 per cent. UTI Mepus was the only close-ended fund to declare a dividend of 15 per cent, according to data from Value Research, a mutual fund rating agency. Industry experts said it was interesting that these funds should declare dividends at a time when the market had fallen significantly.

For instance, Birla SunLife Tax Relief 96’s trailing returns have fallen by 41.17 per cent in the last one year (as on April 2, 2009). Even its three-year trailing returns are down 6.33 per cent. Similarly HDFC Tax Saver’s trailing returns are down 31.03 per cent.

But they have been able to pay good dividends because they have really old funds. “These funds have accumulated profits over the years, which is allowing them to give good dividends even in this bad market,” said a leading mutual fund distributor. All these dividend-paying funds were launched between 1996 and 2000. So, they have accumulated significant profits over the years. For instance, Birla SunLife Tax Relief 96’s average annual trailing return has been a good 29.18 per cent ever since its launch in 1996. Similarly, ICICI Prudential Tax Plan has given 21.15 per cent average returns annually since 1999. However, industry observers are divided in their views on whether ELS schemes should have paid dividends at all. Some feel that since dividend payouts reduce the net asset values (NAVs) to that extent, fund houses should not have paid it. Instead of paying dividends, fund houses should have used the cash to buy stocks, they feel. The reason: markets are quite cheap right now.

“Paying dividends in a rising market makes sense because you are paying from profits. In a falling market, it is better if this cash is conserved to buy stocks,” said an industry observer. On the other hand, paying dividends is a good way to garner more money because it gives the impression that ELS schemes are doing well. For an investor, it’s better to go for the growth option in an ELS scheme because it allows them to accumulate wealth over time.