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Equity schemes may declare huge dividends

MUMBAI: Mutual fund houses are likely to pay huge dividend in their equity-oriented mutual fund schemes before March 31. Wealth managers managing money for the rich have started calling up fund houses asking for huge dividend from such schemes before it becomes taxable from April 1.

Dividend on equity-oriented mutual funds is tax-free for the investor till the end of this financial year. The finance minister has announced a 10 per cent dividend distribution tax for such schemes from April 1. Chief executive officers of at least three fund houses have confirmed receiving requests for dividends from high networth individuals and wealth managers.

"There have been a number of requests from distributors asking for dividends in equity or balanced funds," said the CEO of a fund house at a domestic mutual fund. Many distributors have mobilised big money from HNIs in the past whenever fund houses have declared large dividends.

"Dividend is a big draw to attract investors. Whenever there's a huge dividend, a select set of investors are always ready to invest," said a Mumbai-based distributor.

According to mutual fund regulations, fund houses can pay dividend in their schemes only from realised gains. Given that this is the last chance to pay a dividend before it becomes taxable, many fund houses are likely to announce big dividends in their equity and balanced funds.

Suppose an investor buys into a mutual fund scheme with an NAV of Rs 30 in the dividend option today and the fund declares a dividend of Rs 5 on March 2, an investor earns Rs 5 as tax-free dividend, and post the dividend payment, the NAV drops to Rs 25.

"As per rules, an investor can also claim a notional loss on NAV due to dividend only if the units were bought three months before the record date, or were held for at least nine months after the dividend is paid," said Harshvardhan Roongta, chief financial planner, Roongta Securities.

So, if an investor holds the units till December 2 after a dividend is declared on March 2, and the NAV of the scheme does not go above Rs 30, the investor can redeem the units and book the difference in amount as short-term capital loss.

Distributors have got in a lot of investors into balanced mutual fund schemes over the past oneand-a-half year, with many such schemes paying monthly and quarterly dividends.

Funds such as HDFC Prudence, ICICI Balanced, UTI Balanced, L&T Prudence, Kotak Balance, Tata Balanced, DSP BlackRock Balanced are some schemes that have been paying monthly dividend, while HDFC Balanced, Birla Balance and SBI Balanced have been paying dividend quarterly.

This has drawn money from investors looking to earn tax-free dividend and wanting regular cash flows. Among equity funds, Reliance Top 200, L&T Special Situation, ICICI Prudential Dynamic Plan and BNP Paribas Dividend Yield Fund have been paying a monthly dividend to investors.

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