Dividends dry from equity funds in a bearish market

Aabhas Pandya

Blame it on the bearish markets as dividend payouts from equity funds witness a dry spell this monsoon season. After a flurry of hefty dividends towards the end of calendar 1999 and early 2000, income distribution has virtually come to a naught from equity funds since April 2000. Consider this, between October 1999 and March 2000, as many as 52 dividends were declared by equity funds with as many as 13 funds, paying dividend on more than one occasion.

The same has now dropped by nearly 70 per cent to only 16 payouts between April and August 2000. If one includes the latest dividends in September from Alliance (Alliance '95 and Alliance Equity) and SBI's Magnum Multiplier Plus, the number marginally improves to 19. It's the same story with bonus issues, which stand at nil against seven till March 2000.

However, the quantum of dividends has shown an increase from an average 35 per cent (or Rs 3.5) per unit to 41.6 per cent (Rs 4.16 per unit). Here too, the average higher income is attributed to a 300 per cent dividend from Alliance Capital Tax Relief (ACTR '96) in May 2000. The average payout drops to 24.4 per cent (or Rs 2.44 per unit) if one does not take into account the dividend from ACTR '96.

"The spate of dividends has clearly slowed down in the last five months owing to a sharp fall in the equity markets, led by technology counters. With most equity funds heavily invested in technology stocks, they have been hard-pressed to safeguard their assets, let alone book profits and declare payouts," says the chief investment officer of a private sector AMC. "If at all, fund managers have been able to sell their holdings at a higher price, they have either ploughed back that money into stocks at still cheaper prices or are sitting on cash to grab opportunities in the market," he adds.

Post-April, the picture is most discomforting for the fancied technology funds. All the seven technology funds launched earlier this year, have remained below par for a large part of their tenure and have been unable to make a payout. On the other hand, software funds had made 10 payouts between October 1999 and March 2000 with Kothari Pioneer Infotech fund paying a cumulative dividend of 160 per cent with a 1:1 bonus. Apart from technology and technology heavy funds, dividends has come cropper from other sectoral funds. Against six dividends from various sectoral and specialty funds till March, only UTI's Brand Value fund has made a payout in the current period.

So, what does it mean for the investor, who was lured into the dividend option of equity funds by hefty dividend payouts? One, dividend and bonus distribution from equity funds is a function of the markets. With the markets in a tailspin since late March, the net asset values of equity funds have taken a hit. For instance, in the last six months, the diversified category of equity funds has lost an average 25 per cent while technology funds are down an average 36 per cent!

Investors will do well to understand that equity funds are long-term vehicles for building wealth and not an investment for regular income. No wonder, most equity funds did not have a dividend option till early 1999, when the budget for fiscal 2000 made payouts from open-end equity funds absolutely tax-free. This budgetary sop saw AMCs introducing dividend options in their equity funds and coupled with a booming market, saw funds dole out hefty payouts to attract fresh investments.

However, the tax-free status to equity funds will come under review in 2002. Who knows, the dividend option is made so unattractive that most AMCs are forced to scarp it. So, pray for a surge in equities again so that you make the most of the tax-free dividend till 2002!

Source: Value Research

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