Implications of dividend

IMPLICATIONS OF DIVIDEND

When your mutual fund announces a dividend payout, you have reasons to be pleased. A dividend payout implies that the fund has distributable surplus for its unit holders, which it pays out as dividends.

Dividend amount and frequency

The amount of dividend declared by a mutual fund and its frequency will depend on the amount of profits accumulated with the scheme. There is no fixed or predetermined time or amount that the mutual fund can stipulate for the dividend payout. In other words, there is no guarantee on receipt of dividend.

On making a dividend announcement, the mutual fund will stipulate a ‘record date’. This is the date by which all unit-holders should ensure that their names appear in the mutual fund’s books. Only such unit-holders are entitled to the dividend. For instance, if the mutual fund has made a dividend announcement and set a record date of 30 May , 2006 then if you want to be eligible for the dividend, you should purchase the units and ensure that your name is registered with the fund by this date.

Impact of Dividend Payout on the Scheme’s NAV

When the mutual fund pays out the dividend, its corpus stands reduced to that extent. This results in a fall in the scheme’s NAV. However, the NAV does not only get affected by this factor. Change in market prices of the securities held in the scheme’s portfolio play a larger role in affecting the NAV. If the markets are on an upwards trend, even after a dividend payout, the NAV may rise. However, if the markets are moving southward, the NAV will reflect a fall, which may be higher than the dividend payout amount.
The amount of dividend that you are eligible for, will depend on the number of units that you hold. For instances, if you hold 1,000 units (which have a face value Rs 10 per unit) of XYZ Mutual Fund Scheme and the scheme announces dividend of 5%, the dividend amount per unit would be Re 0.50(5 percent x face value of Rs.10) Therefore, the amount of dividend that you would be eligible to would be Rs.500 (Re 0.50 x 1,000units)

For the financial year 2005-06 (1 April 2005 to 31 March 2006), the highest dividend payout has been by Principal Resurgent India Equity Fund (170 percent) followed by Reliance Growth Fund and Reliance Vision Fund, both of which declared total dividends 105 percent during the year.

Tax implications

Dividends received from equity mutual funds are tax free in the hands of the unit holders.

The following points may be noted:

Ø There is no fixed or predetermined time or amount that the mutual fund can stipulate for the dividend payout.
Ø When the mutual funds pay out the dividend, there maybe a fall in the scheme’s NAV.
Ø The amount of dividend that you are eligible for, will depend on the number of units that you hold.
Ø Dividends received from equity mutual funds are tax freeing the hands of the unit holders.
Ø If you foresee the markets to continue its northward journey, opt for a dividend plan.

When the stock markets are on a growth momentum and a mutual fund scheme has been moving in tandem with the broad market movement, it has been observed that generally the quantum and frequency of dividend rises. Therefore, if you foresee the markets to continue its northward journey, and you are confident that the mutual fund scheme that you are investing in, will be able to go for a dividend plan. The tax advantage is an added bonanza.