I lost Rs 18 lakh, my mutual fund not declaring dividends anymore. What should I do?

I invested a lumpsum of Rs 50 lakh in ICICI Prudential Equity & Debt Fund (Monthly dividend) in November, 2017. Since I was new to mutual funds I was late to realise that the best way to enter mutual fund market was SIP. Also, instead of dividend plan I should have gone for growth and opted for SWP since I needed a monthly amount to settle my loan EMIs.

Now, not only the fund has stopped paying dividends, but even the value of investment has dropped dramatically, making a loss of almost Rs 18 lakh as on 23rd April 2020. I have an investment horizon of a another five years and I can sustain without pulling out my lumpsum investment.

Kindly suggest if I should continue in my present scheme till my initial investment is recovered or should I switch over to some other equity-oriented scheme opting for SWP since I need a regular monthly amount. Further, if I switch should I immediately opt for SWP or should I wait for at least one year to avoid exit load?

--Pinaki Mohapatra

Before you commit another mistake of investing in a pure equity scheme to take care of your regular EMI, please seek the help of a mutual fund advisor or financial planer who would offer you a personalised solution after getting more details about your financial situation. We will offer you a few general tips based on the information provided by you.

First, you have invested in an aggressive hybrid scheme. Aggressive hybrid schemes invest at least 65% of their corpus in stocks. As you would know, the stock market has crashed 30% last month, and even though it has recovered significantly from the lows, the market is still down and volatile. Almost all equity mutual funds, including aggressive hybrid schemes, have been hit by the volatility in the market. Since you have another five years, you may hold on to your investments and hope for a market recovery.

However, it is not clear why you have deployed the money you need to repay your EMI in an equity mutual fund scheme. Mutual fund advisors often ask individuals, especially retirees, to set up an SWP in a debt mutual fund scheme to supplement their regular income. The basic idea is that you withdraw a little lower than what you earn in the scheme to preserve the capital. However, it is important to invest in a scheme with very little volatility for this strategy to work. If the scheme is volatile, then you would start consuming the capital at some point. This is what happens when you set up an SWP in an equity scheme. When there is a huge volatility in the market, the scheme may lose value sharply. And if the trend is prolonged, you might start using your capital for regular income. Unless you invest for a very long period, you may not be able to avoid this situation during a sharp downturn.

According to Sebi norms, mutual funds can declare dividends only on realised profits. That explains why your scheme is not declaring dividends in the current market scenario. Many mutual fund distributors used to use the dividend paying track record of aggressive hybrid schemes as sales pitch to sell them. However, many of them have stopped paying regularly after the market hit a rough patch a few years ago, and this myth was busted.

As you can see, both these strategies have their limitations. Discuss them with a financial advisor and also check whether prepayment of your loan makes more sense. Always try to understand the logic behind a strategy, including investment strategy, before betting on it. This will help you to choose the best strategy that works for you.