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Dividend or growth: Fund investment dilemmas

BS Reporter in Mumbai | February 02, 2009 15:30 IST

In such volatile times, isn't the dividend payout option better than growth? At least, the investor stands to earn something, thereby shielding one from accruing more losses. This way, at least one has some 'realised' gains rather than 'unrealised gains/loss.'

-- Naga

We believe that equity as an asset class is suited only to accumulate wealth over the long-term. It encompasses maximum utilisation of investment, as well as gains earned from these investments. A dividend payout disrupts that.

In case of a growth option, the gains remain unrealised and can be imputed on the basis of the change in the net asset value. Though periodic dividend from equity may help many investors derive psychological comfort that their investment is at work and rewarding, it restricts the gains from being re-invested. Hence, it does not constitute long-term wealth creation. If deriving periodic income from investment is your objective, then equity may not be a suitable vehicle.

Dividend payout may not be the correct option to shield one from accruing more losses. In order to face volatile times, we suggest periodic rebalancing. Here you derive your gains by choice with a purpose. This is done by partially realising gains from profiting investments and investing the proceeds in debt. This ensures safety of the realised gains. For investments that are making losses, we suggest investing more in them so that you buy them at low prices. It not only takes care of maintaining correct asset allocation but also gives the choice of whether to realise profits or to invest more.

Is there any index fund, which is also eligible for tax benefits, like equity linked savings schemes? If no, is there any ELSS with a very low turnover and mirrors the Nifty? I would like to take the benefit of index investing and at the same time getting the ELSS benefit too.

-- M Anand

Currently there is just one fund that is an index based -- India Index Tax Fund. It endeavours to track the S&P CNX Nifty index (Nifty). But this fund does not accept fresh subscriptions anymore. The sale of its units were suspended from August 17, 2004.

Existing ELSS funds function are diversified equity schemes. They do not provide the benefit of index investing. The benefits of tax saving and index investing in the same fund is not available in the mutual fund industry as of now.

I have invested around Rs 3 lakh (Rs 300,000) in Reliance [Get Quote] Regular Savings Equity, IDFC [Get Quote] Premier Equity and Sundaram Select Focus. I had invested in these funds when they were top performers, but now they are at the bottom of the pyramid. This led me to analyse the consistency of fund performance and I observed that most funds are not performing consistently. In this situation how can one select a fund? 

-- Nirav Dadhania

The lesson here is 'don't chase performance.' Chasing performance will not lead to effective investments. A wise approach to investing entails a well-researched portfolio that leads to your goal. And, more importantly, investing is a long-term proposition.

Equities do have the potential to generate superior returns but it is also the most volatile asset class. So the performance of equity funds in the short term should not influence your investing decisions and a disciplined approach should be maintained.

It is always better to invest in well-established funds. The key word here is long-term. Look for a good and consistent performance record over the long term.

Franklin India Blue Chip Fund announced a 30 per cent dividend on January 15, 2009. If I invest in the same fund on January 14, 2009 can I get 30 per cent dividend? If the amount invested was Rs 2 lakh (Rs 200,000) what amount will I get as dividend?

-- Sharad Rokade

Dividends are paid to those who hold units at the close of the business hours on the record date.

There is a difference between record date and dividend declaration date. The dividend option of the Franklin India Bluechip fund declared a 30 per cent dividend on January 15, 2009 (which is the dividend declaration date) and fixed January 21, 2009, as the record date. So any person who held the units on the record date will be eligible to receive the dividend. Since you have entered the fund before the record date, and assuming you were invested in the fund on the record date that is, January 21, you are eligible for the dividend.

The dividend is always declared as a percentage of the face value of the fund's units. A 30 per cent dividend on the face value of Rs 10 per unit implies Rs 3 dividend on each unit. Assuming that you invested Rs 2 lakh on January 14, 2009, without any entry load, the number of units comes to 8,048 as the NAV on that day was Rs 24.85. Now for a 30 per cent dividend which comes out as Rs 3 per unit, you would get Rs 24, 144.

I have some ELSS funds. Can I redeem them within the three years lock-in period? Can I transfer the above ELSS to other funds like debt funds? If I redeem ELSS funds within the lock-in period, what will be the tax implication?

-- Mathivanan Devadoss R

ELSS funds can neither be redeemed nor transferred within their mandatory three year lock-in period. They can be transferred to debt after this time period. And there cannot be any tax implication as you cannot withdraw of transfer units.

Answers: Value Research

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