Dividend buzz helps sell old equity-linked savings schemes

Vivek Kaul & Sanat Vallikappen

MUMBAI: Psst. Want to swallow your mutual fund dividend cake and have it, too? Try the Birla Sun Life Tax Relief 96, a tax-saving fund from Birla Sun Life Mutual Fund.

The fund has already declared a Rs 25 dividend in December (on a Rs 10 unit), and the buzz among distributors is that another Rs 25 dividend is on the way in January and yet another Rs 50 by March.

That’s a neat Rs 100 payback in three months, and you get a tax break on top of it all, for this is an equity-linked savings scheme (ELSS).

A caveat, though: the buzz is so strong that Birla Sun Life Tax Relief 96 has more than doubled its assets under management (AUM) between November 30, 2006, and December 31, 2006.

AUM went up by 225% to Rs 195 crore. Since the fund has been around for more than 10 years, one wonders why everybody thought this is the right season to invest.

Asked about the phenomenal AUM growth, Raghvendra Nath, vice-president of strategy and marketing at Birla Sun Life Mutual Fund, said: “Our scheme has been among the top performing equity-linked savings schemes in the one-year period and we have been marketing it aggressively.

Further, the December 8, 2006 dividend generated a lot of interest in the scheme.”

Did distributors get a whiff of the coming booty in advance? Replies Nath: “I cannot react to information gathered from market sources. Birla Sun Life follows regulations to the hilt,” he said. The regulations state that book closures for dividends have to come within five days of the announcement.

According to distributors, Birla Sun Life isn’t the only scheme raking it in. Another fund in the midst of a buzz about dividends is SBI Magnum Taxgain (Rs 15-20 on a Rs 10 unit).

Principal Tax Savings declared a dividend of Rs 5 per unit on January 11, 2007, with a record date of January 15, 2007.

Some distributors were not surprised by the announcement. ABN Amro Equity Fund declared a dividend of Rs 6 per unit on January 12, 2007, with a record date of January 17, 2007. Again, distributors were not surprised.

The math clearly works for most investors who made the bet in December. Let’s take the case of Birla Sun Life Tax Relief 96. If market insiders are right, the fund will offer another Rs 75 as dividends by March.

So, if an investor had bought Rs 1 lakh worth of units on December 8, 2006, the record date for the first dividend, he would have got around 504 units at the then sale price of Rs 198.30 per unit (source:www.amfiindia.com).

If the fund pays a total of Rs 100 by March (including the December 8 dividend), the investor would get a total of Rs 50,428.6 (504.286 x Rs 100) by the end of March. Dividends from equity funds are tax-free.

Assuming the investor is in the top 30% tax bracket, he also saves a minimum of Rs 30,000 as tax (more, if you take surcharge and cess).

So effectively only Rs 49,571.4 (Rs 1 lakh - Rs  50,428.6) needs to be invested to get a tax break of Rs 30,000. Hence, the effective tax break works out to 60.5% (Rs 30,000/ Rs 49,571.4) on the amount invested.

No other tax-saving option allows investors recovery of money at such a fast rate. Tax saving funds have a lock-in period of three years. But in this case almost half the money is being recovered upfront.

Till last year, mutual funds had a very simple way of attracting money into the dividend option of ELSS schemes. In the months leading to March 31, schemes would declare very high dividends.

This would be followed by high decibel advertising campaigns through the print media and outdoor advertising. Typically, the record date for the dividend would be at least a month after the date of announcement of the dividend. This would attract investors and give them enough time to invest in the scheme.

On April 4, 2006, however, regulations were changed. The record date now has to be just five calendar days from the date when notice on the dividend declaration is given.

Closing the gap between announcement and book closure reduces the chances of malpractices. 

Sebi circular also makes it clear that “Before the issue of such notice, no communication indicating the probable date of dividend declaration in any manner whatsoever may be issued by any mutual fund or distributors of its products”.

However, it is moot point whether this guideline is observed in both letter and spirit, since the clandestine nature of the information leaked makes it difficult to nail it down to specific sources.

Barring uninformed investors, the arrangement works well for everybody else. The mutual funds, which get asset management fees and upfront loads, benefit. The investors who get huge, unintended tax breaks also laugh all the way to the bank. The fund distributor collects sales commissions.

Moreover, high dividends bring down the net asset values of the scheme. From a marketing point of view, this is attractive. Investors are suckers for low-priced mutual funds compared to higher price ones.