Equity MFs lure investors with dividend

With lacklustre sales and uncertain equity markets hitting investors hard, equity mutual funds (MFs) are doling out dividends to sustain interest. There has been a flurry of dividend announcements with as many as six schemes declaring payouts in the past 10 days.
Equity MFs started offering dividends following the market recovery in January-March. But with funds yet to recoup the losses they suffered in 2011, the quantum of dividends has come down sharply in most schemes.The sensex slumped 25% last year as high interest rates and input costs dented profits of companies amidst an uncertain global environment.
While small and mid-cap funds have gained 20.3% so far in 2012, diversified equity MFs and large and mid-cap funds have advanced by 15% and 14%, respectively. This has given equity funds an opportunity to distribute the profits and attract investors.
Despite the market rebound, sales from equity schemes came at Rs 10,728 crore in January-March this year — 36.8% lower than the same period last year as wary local investors kept off the rally fuelled by heavy buying from foreign institutional investors (FIIs). “Mutual funds are throwing some profits back to investors,” a senior official with a leading fund house said. “It is a defensive strategy. It would help in stopping investors from making an exit.” Abhinav Angirish, founder of investonline.in, an investment advisory service, also said, “This (dividend) is an attempt to win back investors.”
Fund houses pay dividends to investors in equity schemes at least once a year. Dividend announcements usually gather steam at the close of the financial year. A large number of equity funds declare payouts during this period to sustain the interest of existing investors and gain the confidence of prospective clients. But dividends and the number of funds offering them dropped in the beginning of the payouts season as it came immediately after the huge drop in equity markets.
The payout rate, like their peers in other categories, was much lower than last year. Many funds gave high dividends, though markets were choppy, to lure investors. As a result, their net asset values came down sharply. This prompted market regulator Sebi to stipulate in 2010 that dividends should be offered only from actual realized gains and not from the unit premium reserve. This had a sobering effect on payouts with the quantum of dividend dropping when the market conditions turned bad.