MFs await SEBI nod to iron out differences in dividend payouts in direct and regular plans

Direct plans of mutual funds that save on distributor commissions and give investors better returns than regular plans were introduced in January 2013. But nearly six-and-a-half years later, a pain point persists. There are several cases of dividend payouts being different between the regular plans and direct plans of the same schemes.

Industry sources attribute such differences largely to the peculiarities of Unit Premium Reserve (UPR), an accounting adjustment mandated by market regulator SEBI. They say that despite several representations, SEBI has not yet changed the norms and so, the matter remains unsorted. Meanwhile, several investors are worried.

Take, for instance, Chennai-based N Sethuraman, who has invested in the direct plans of a few mutual funds; while direct plans do give him better returns, for some time now, Sethuraman has been getting a lower dividend than regular plan investors under the same schemes. For instance, last month, Canara Robeco Equity Hybrid fund declared a dividend of ₹0.61 per unit on its regular plan. But in the direct plan, the dividend was lower – ₹0.53 a unit. Similarly, the dividend declared by DSP Equity & Bond fund last month on its direct plan (₹0.16 a unit) was lower than that on its regular plan (₹0.21 a unit). There are many other cases across fund houses of differences in dividends.

Sethuraman feels that mutual funds are keeping dividends low in direct plans to make them less attractive to investors and nudge them towards regular plans.

Industry sources disagree. They say that the difference in dividend is purely due to an accounting anomaly regarding the treatment of the UPR. “Every time we declare a dividend, we get complaints from investors about dividends in direct plans being less than in regular plans,” says an official at a leading fund house. “We have made many representations to SEBI with details via industry body AMFI. But the matter has not yet been sorted out.”

The official adds: “SEBI has to change its accounting guidelines; this may involve some legal process.”

UPR & distributable surplus

Per SEBI norms, fund houses have to calculate dividends for each of their plans based on the distributable surplus. A plan’s distributable surplus is computed as its net asset value (NAV) minus its face value, unrealised gains and accumulated UPR. So, the ability to declare dividends depends, among other factors, on the UPR balance. Some plans have a lower distributable surplus due to a higher proportion of UPR.

When new units are purchased in a plan, UPR is created to account for unrealised gains that belong to the existing units. But the trouble is that the UPR reversal later happens only when units are redeemed and not when unrealised gains become realised gains.

When direct plans were introduced in 2013, there were large one-time inflows and switches from regular plans. This resulted in large UPR creation at that time in direct plans and reduced their distributable surplus. This problem of lower distributable surplus and lower dividends due to high UPR is not restricted to direct plans. There are also many cases of regular plans paying lower dividend per unit than direct plans. For instance, in March 2018, the SBI Small Cap fund declared a dividend per unit of ₹9.1 on its regular plan, lower than the ₹11.1 on its direct plan. Fund houses have requested SEBI to relax the UPR accounting norms so that the distributable surplus of plans increases and dividend parity can be maintained.

Alternative to dividends

Investors upset at lower dividends from their plans can explore other alternatives for regular income. Systematic withdrawal plans (SWP) can, in most cases, be more tax efficient than dividend receipts.

Dividends are not assured, and payment of dividend entails dividend distribution tax. SWP, on the other hand, provides scope for tax planning. For instance, gains on equity units sold after a year qualify as long-term capital gains, and such gains are exempt from tax up to ₹1 lakh a year.

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