The frequency and quantum of dividend payouts to investors by mutual funds might be

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sharply reduced following the Securities and Exchange Board of India (Sebi’s) recent guidelines asking fund houses not to pay dividends from unit premium reserve (UPR).

The market regulator has observed that many mutual funds are using unit premium reserve, which is the appreciation of the net asset value over the face value, and not from the realised gain, that is, gain from the sales of shares held by funds.

Sanjoy Banerjee, executive director, Icra Online, a mutual fund tracker, said that at present, the dividend payout is more like ‘return of investor’s money rather than return on their money’. The new ruling would ensure that fund houses pay only from the realised gain, he added.

“This means fund houses would find it difficult pay multiple and large dividends to investors, a strategy adopted by fund houses to attract new investors,” he added.

The chief executive officer of a fund house on the condition of anonymity told Financial Chronicle that the new ruling would make it difficult for those fund houses, which pay huge dividends. “Fund houses usually pay dividends to new investors, who invested in a fund just ahead of the dividend payout date without even investing the pool of funds collected from them, a strategy used by fund houses to attract new investors. With this rule, this practice would largely be curbed,” he added.

Mutual fund houses use dividends as a marketing tool to attract new investors. This practice is seen mostly in the last two quarters of a financial year, when mutual funds try to get a share of tax-saving investments into their tax-saver funds.

This year also, many fund houses, especially the smaller ones, have been very aggressive in paying out dividends to attract new customers. Fund houses such as Taurus Mutual Fund, Bharti Axa and Sundaram BNP Paribas Mutual Fund have paid multiple dividends within a span of three-four months.

Waqar Naqvi, chief executive officer, Taurus Mutual Fund, said, “Instead of paying a large one-time dividend payout, we spread the payouts over a period of three months to enable new investors to benefit from the payouts.”

Mahesh Patil, co-head, equity, Birla Sun Life Mutual Fund, said, schemes declare dividend based on the distributable surplus they create.

“However, when the markets are volatile like in 2008 and early 2009, most schemes could not generate enough distributable surplus and hence didn't declare dividends. The past one-year period has seen the markets rally and thus portfolios have generated distributable surplus and the fund manager has shared this with investors by through dividends,”

he said.