A mutual fund scheme can declare dividends only from the realised profits in its portfolio. Realised profits are the gains made by the fund manager from the instruments by selling them and booking profits or when he receives dividend or interest (in case of debt funds) from the instruments the scheme holds. Unrealised profits or paper profit from the instruments held cannot be used to pay dividends.
Due to poor liquidity in many small-cap stocks, and sharp fall in share prices, fund managers have been unable to sell stocks as the impact cost will be very high. As a result, there are no distributable profits in the scheme. “We are in the process of booking profits in the scheme to pay dividends. Once this is done over the next few days we will approach the trustees again and, post their approval, pay the dividend,” says Sunil Subramaniam, MD, Sundaram Mutual Fund.
The scheme has a track record of paying a quarterly dividend consistently over the last couple of years to its unitholders since March 2016. It has assets of Rs 1,037 crore and has lost 32.09 per cent in the last one year. However, over a 5-year period it has returned an annualised 19.77 per cent to investors. The top three stocks in the portfolio are NRB Bearings, Navin Fluorine and Praj Industries.
As per Value Research, the small-cap fund category is down by 22.64 per cent in the last one year, while the Nifty Smallcap 250 TRI is down by 30.53 per cent.
In a bid to attract investors to equity and hybrid mutual fund schemes in 2016 to 2018, many fund houses started doling out regular monthly or quarterly dividends to investors. Many investors including retirees starting relying on this monthly dividend to meet their monthly cash flows.
Fund houses cannot promise dividend to unitholders. It can be paid as and when the fund house books profits. “Small-cap funds are very volatile and investors should use them for growth and not have any regular periodic dividend expectations from this category,” says Amol Joshi, founder, Plan Rupee.
Investments in dividend option of schemes slowed down post April 2018, as unit holders had to bear a 10 per cent dividend distribution tax. As compared to this, long-term capital gains up to Rs 1 lakh per year are tax free for investors.