Tax saver funds dole out dividends as markets rise

Chennai: It is raining dividends for investors in equitylinked savings schemes (ELSS). With equity markets turning buoyant, as many as 10 tax-saver mutual fund (MF) schemes, as ELSS is popularly known, have either paid dividends or are in the process of doing so this month.
Tax-saver funds have beaten benchmark indices such as the sensex in the current rally as well as over the oneyear time frame.

These funds surged 25.8% over the past one year and have delivered 9.9% returns so far in 2017. In contrast, the benchmark sensex and the broader Nifty indices have gained 17.6% and 19.3% respectively over the one-year time frame and have advanced 8.7% and 9.1% so far in 2017.

Tata India Tax Savings Fund has given a dividend of Rs 9 per unit, the highest by the fund since 2005. This is also among the highest payouts by a fund in the ELSS category in the current financial year. But it has been a mixed bag for other funds, which have either maintained payouts at earlier levels or increased them marginally .



“The steady market conditions has helped ELSS to maintain the dividend track record,“ says A Balasubramanian, managing director and CEO, Birla Sun Life MF. “Dividends would be usually above bank FD (fixed deposit) rates. Funds typically pay 11 12% as dividends on an average,“ he says. “Equity markets have done well. This has enabled us to maintain payouts,“ says Raghav Iyengar, executive vice president, ICICI Prudential MF.

Fund houses typically announce dividends in tax-saver MFs to attract investors who buy ELSS towards the end of the financial year. These payouts ensure income as well as tax savings for investors. Net inflows (higher purchase in schemes than sales) into tax saver MFs surged 57.1% year-on-year to Rs 7,191 crore ($1.08 billion) in the first 11months of 2016-17.

Dividends had dried up between 2010 and 2014 as the markets remained tepid.

Several schemes did not pay dividends during this time frame because they did not have enough incremental profits. The last three months of the financial year is the busiest period for ELSS as investors rush to buy these products to save tax on time.

Several equity funds used to offer high dividends even if the market conditions were bad just to lure investors in the past.

This prompted market regulator SEBI to stipulate in 2010 that dividends should be given only from actual realised gains and not from the unit premium reserve. This has had a sobering effect on payouts with fund houses either stopping or offering lower dividends when the market conditions turned bad.