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It’s raining dividends at MFs

This article was posted on Jun 30, 2009 and is filed under Market News

MUMBAI: Equity mutual funds are handing out dividends to investors like never before. Fund houses such as Franklin Templeton, SBI Mutual, HDFC
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MF, Reliance MF, Tata MF and UTI have announced dividends of 20-60% in their bid to encourage investors to retain money in existing schemes.

More than anything else, the near-80% market rise over the past four months has helped mutual funds to distribute surplus profits. Fund houses have seen a phenomenal AUM growth over the past six months. Even smaller fund houses, including Baroda Pioneer AMC, DBS Chola, Taurus Mutual Fund, Canara Robecco, DBS Chola and Religare MF, have seen a decent appreciation in their assets under management during this period.

“One of the reasons for handing out large dividends is to keep retail investors in good spirits,” said the fund manager of a joint venture (between Indian and foreign entities) mutual fund house. “A good dividend payout, especially in times of uncertain markets, will prompt them to stay invested in schemes.

Huge dividend payout will also help distributors sell the product more efficiently and bring in more money,” the fund manager added.

Adds Saurabh Nanavati, CEO, Religare Mutual Fund, “Retail investors — especially elderly investors — expect dividend payouts periodically. Fund houses could not pay dividends last year as a result of the market downturn. The market rise, this year, has yielded surplus profits that are now being distributed to the investors,” he said.
Conventional fund management wisdom makes it imperative for fund managers to declare dividends as this is one of the few ways to take profits off the table.

This is more so in the case of overheated markets where there are not many good investment opportunities. Mutual funds pay dividends out of the surpluses (gains) they generate over a fixed period, say six months to one year.

“Dividend is only one of the evaluation parameters to be considered when investing in equity funds — focus being on consistency in dividend payout rather than the quantum of payout.

Typically, equity funds, which have a long-established track record and have built up strong surpluses are able to give consistent dividends through market cycles,” said Sukumar Rajah, CIO-equity, Franklin Templeton Investments.

The effect of dividend payout is that the fund size reduces by the amount of money distributed. This is also reflected in the decline in net asset value.

source: Economictimes

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