N Sundaresha Subramanian

What would you do if you purchase a movie ticket and later discover that there won’t be a show? Investors who bought units in dividend options of a number of mutual fund schemes find themselves in a similar situation.

A DNA Money analysis shows that at least 20 schemes from various fund houses having dividend options have not declared dividends for the past two years.

Though the fund houses absolve themselves of any obligation to declare dividends periodically, through riders in the offer document, they often go to town about their “excellent dividend declaration” record.

According to data from www.mutualfundsindia. com, four schemes from Birla Sunlife, three from UTI and two each from JM, SBI, BOB, ING and DBS mutual funds have not declared dividends for the past 24 months or more.

Prinicipal Index fund, Kotak Midcap Fund and DWS Investment Opportunity Fund also did not live up to investors’ expectations of cash flow.

Mutual fund schemes have two investment options for investors. Depending upon his investment plan, the investor can choose between growth and dividend options.

Typically, an investor who plans to stay in a scheme for a long period and wants his money to grow,would opt for a growth option. On the other hand, an investor who wishes to receive regular cash flow from his investment would opt for the dividend option.

Says Pramod Puranik, a mutual fund advisor based in Nashik, “The investor chooses a dividend option because he is anticipating a cash flow in future. He makes his financial plans accordingly. But, when there are no dividends and for such long periods, his plans go for a toss.What is the logic in keeping distributable profits, only to see them melt away in the crash?”

Puranik’s lament seems vindicated as data shows 18 out of the 20 schemes have lost money in the last three months’ crash. The average loss is 17%. Had the dividends been distributed, investors’ loss would have been cut to that extent.

However, fund managers don’t buy that argument.

Says A Balasubramanian, CIO, Birla Sunlife Mutual fund, whose Birla MNC fund has not declared dividend for the past three years, “Wherever there is a distributable surplus and wherever it fits our calendar, we have declared dividend. Dividend declaration is an activity that takes a lot of time and it involves selling of stocks across schemes. Even in the past year, we have declared dividends in a number of schemes.”

Sanjay Sinha, CIO, SBI Mutual fund says, “We would like to declare dividend in most of our broad-based diversified funds at least once a year as a matter of discipline. This way,we keep on booking profits regularly and help the investor maintain a cash flow.”

However, the same may not apply to the sector funds, feels Sinha.

“It is fairly logical in case of a sector fund that dividends may not be declared every year. It makes sense in a sector fund when the sector has done fantastically well. But, if that’s not the case, declaring dividends would skew the asset allocation of the investor and he may not achieve his investment objective.”

SBI MF’s Magnum Sector Umbrella pharma fund last declared a 39% dividend on December 31, 2004.

Among the 20 schemes that have not declared dividends in two years, five are sector-specific funds focusing on auto and healthcare pharma. These sectors have been laggards in the bull run. Investors who intend to redeem units within one year of investing in a fund would be better off under the dividend option, say tax experts. Only, investors are often at the mercy of the fund house to distribute dividends

Source : DNA