Sebi tells MFs to rename dividend plans

The regulator has asked mutual fund houses to rename dividend plans in both their existing as well as new schemes. It has also asked fund houses to clearly communicate to investors that a certain portion of his capital can be distributed as dividend.

In every existing scheme as well as new fund offer, where the fund house offers a dividend option, all the three options have to be renamed. The dividend payout option will be renamed as Payout of Income Distribution cum capital withdrawal option, dividend re-investment will be renamed as reinvestment of Income distribution cum capital withdrawal plan and Dividend transfer plan to be renamed as Transfer of income distribution cum capital withdrawal plan.

Distributors point out that in the past there have been several occasions where equity and hybrid products have been sold on the basis of paying promise of a regular dividend. Many investors bought such schemes for dividends without understanding the product or the risk associated. When markets fell, and fund houses skipped dividend, or investors redeemed they realised it was paid from their capital only.

“The purpose of this move is to communicate to investors that in case of equity shares dividend is a distribution of profits by a corporation to its shareholders, but in the case of mutual fund units it is paid out from your own capital,” says the CEO of a bank based fund house.

Fund houses shall have to ensure that a clear segregation between income distribution which is appreciation of net asset value (NAV) and capital distribution shall be disclosed in the consolidated account statement.

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