Equity mutual funds give dividends on back of market rally

It is raining dividends for investors in equity mutual funds (MFs). As many as eight equity MF schemes are offering dividends to investors now. Payouts have also become bigger with fund houses offering as much as 40% in dividends following the sharp rally in markets. HDFC, ICICI Prudential MF, Reliance MF, Tata MF and Religare MF are among the fund houses that are offering dividends now.

While payouts are a regular feature at this time of the year, especially by equity-linked savings schemes (ELSS) or tax-saver funds that try to at tract investors making their investments at the last minute to bring down taxes, dividends have been higher than last year in most schemes.

Interestingly, some fund houses are giving payouts for the second time in less than three months after their schemes beat their underlying indices by a wide margin. For instance, ICICI Prudential Tax Plan, which gave a dividend of Rs 2 per unit (20%) in early November 2014, is now offering the same payout now.

The fund's regular plan has soared nearly 68% in the last one year. Its underlying benchmark CNX 500 has gained almost 53% during the period. Similarly , Tata Tax Savings Fund, which offered a payout of Rs 2.75 per unit (27.5%) only in mid-December, is now providing Rs 2.85 per unit to investors.

The fund has surged nearly 65% in the one-year timeframe compared to the about 43% returns posted by the sensex, its underlying index.

“It is a function of markets.We are giving bigger dividends as the markets are at an all-time high,“ says Sankaran Naren, chief investment officer, ICICI Prudential MF. “The disposable surplus is more now. So, we are sharing the profits with investors,“ says Sunil Singhania, head ( equities), Reliance Capital Asset Management.

The dividend payout for investors of Reliance Regular Savings Equity and HDFC Premier Multi-cap schemes have more than doubled (in percentage terms) compared to last year. Religare Invesco Mid-Cap Fund, which has nearly doubled its net asset value (NAV) in the last one year, declared its maiden dividend of Rs 2.9 per unit (29%).

Several equity funds used to offer high dividends even if the market conditions were bad just to lure investors. This prompted market regulator Sebi to stipulate in 2010 that dividends should be given only from actual realized gains and not from the unit premium reserve. This had a sobering effect on payouts with fund houses either stopping or offering lower dividends when the market conditions turned bad.