MF Dividends and SEBI

As per new Guidelines from SEBI , Mutual Funds can only declare dividends from "Realised Gains" and not from the "Unit Premium Reserve".

What exactly does this mean , well , let me explain, Suppose MF came out with a fund with a face value of Rs.10 and lets say after a year the NAV of the scheme is 22 . If you are going to buy a unit in this scheme now , Rs.10 would go into the capital fund and the amount greater than the face value i.e Rs.12 in this case goes into a account called Unit Premium Reserve, Ideally, the mutual fund is suppose to use this amount to buy equity from the market or rather invest and let that money grow .

But the Mutual funds did not do that , they would try to lure more people into investing in their schemes , by declaring dividends and the dividends would be paid from this Unit Premium Reserve, which means the mutual fund is paying back to the investor , the same money which they invested few days back .

So in order to prevent this farce , SEBI declared that hence forth , dividends cannot be paid from the Unit Premium Reserve, but must be from "Realised Gains", i.e from profits made from investment activity by the mutual fund .

This is sure to improve the HEALTH of the Mutual funds , as only serious long term investor may invest , and also for MF to generate "Realised Gains", they need to invest , investor's funds prudently and profitably.

Image : FreeDigitalPhotos.net,Photographer:  renjith krishnan