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SEBI asks mutual funds (MFs) to express dividend in Rupees, not as a percentage

The Securities and Exchange Board of India (SEBI) has asked mutual funds to quote the dividend declared on their various schemes in absolute Rupee terms, and not as a percentage.



Mutual funds (MFs) invest funds on your behalf, and earn profits from time to time on this investment depending on the performance of the markets.

(To know more about investment in MFs, please read “Direct investment in Stocks versus Mutual Funds MFs”)

These MFs also pay back this profit to their investors – you – from time to time in the form of dividends.

(Instead of paying out the profit as dividend, MFs can also retain it and increase the NAV of each MF unit – this happens in the Growth option of a mutual fund. For more details, please read “Mutual Funds – Growth or Dividend option?”)

So far, most fund houses declared the dividend as a percentage. So, it was up to you to find out how much it was in actual Rupee terms. Now, the Securities and Exchange Board of India (SEBI) has asked mutual funds to quote the dividend declared in absolute Rupee terms, and not as a percentage.


Why is quoting dividend as a percentage not good?

So, what was wrong with expressing dividend as a percentage? Because many investors did not know the answer to the question: “A percentage of what?

Dividend declared was expressed as a percentage of the face value of the units, which is Rs. 10. However, many people misunderstood it as return on investment – and this was totally wrong.

Various MF houses exploited this lack of knowledge, and quoted the dividend as a percentage – especially in their advertisements, which was highly misleading and resulted in mis-selling of MF schemes.


An example to understand this

Let’s say a mutual fund scheme’s prevailing Net Asset Value (NAV) is Rs. 80. The face value of each unit is Rs. 10.

Now, when the MF company says it has declared a dividend of 30%, it is actually saying that the dividend is Rs. 3 for every unit held by you (30% of the face value of Rs. 10).

However, as an investor, you subconsciously think of it as a rate of return from your investment – you think you would get 30% of the NAV as dividend (or Rs. 24 per unit held). You compare it with the return that you get from a fixed deposit (say 8%), and conclude that the MF scheme is awesome!

(For more on fixed deposits, please read “Fixed Deposit (FD) – A favourite for generations”)


Conclusion

This directive would bring more transparency to MFs and the way they report their returns. Going forward, gauging fund performance and comparing one fund with another would become easier.

This is a step in the right direction, and would help retail investors like you and me.

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