At the beginning of this financial year, Sebi changed one of the oldest cases of nomenclature in Indian mutual funds–there is no such thing as dividend any more. What used to be called dividend is now simply called distribution and what used to be called dividend schemes of mutual fund schemes are now called’ Income Distribution cum Capital Withdrawal’ schedules. That’s a mouthful so these will be called IDCW, which is also a mouthful but good-for-nothing can only be done about that, or should be done, because the term is accurate.It’s accurate because in any real sense of the word, there were never any bonus paid in mutual funds. It was always an semblance. What was announced dividend was always exactly what the new epithet says: Income Distribution cum Capital Withdrawal. However, it’s quite clear that a good deal of investors are still having some problems understanding what this whole business is all about and conceive( are being misled) into thinking that the payout is actually a gain and exclusively the list has been changed. The reality is the opposite. It was never a gain and the specify have already had been changed to the correct one.Once upon a hour( intending till two months before ), dividends in mutual funds were well-understood to be a sales-boosting prank. Not by investors, plainly, who were the target of this ruse but by money salesman and distributors. When stores came out with bonus, salespeople showed that off to potential investors as evidence of it being a good fund. Over the years, Sebi cracked down on the source and accounting of the money that was distributed as dividend but the quality affirmation idea was still softly promoted while making a sales pitch.Let’s understand what the bonu/ IDCW is. Let’s say you own a thousand legions in a fund with an NAV of Rs 20. Your investment is worth Rs 20,000. The fund announces a gain/ IDCW of 20 %. That’s 20% of face value, which is Rs 10, or a payout amount per unit of Rs 2. For your thousand contingents, you’ll get Rs 2,000. However, this amount will come straight from the value of your investment. On the record date, the NAV of the fund will drop by Rs 2 to Rs 18. This means that along with receiving Rs 2,000 as bonu/ IDCW, your investment will be worth Rs 2,000 less. There is no bonanza. You have gained nothing. Financially, it’s exactly as if you have withdrawn that fund from the fund. So coming a mutual fund dividend/ IDCW is a zero-sum game. Bonus/ IDCW have no impact on the return you are getting from your investment. There are no exceptions to this and there is no additional benefit at all. This payout just signifies making some of the money that was already yours and granting it to you. Unless you need the income, there is no sense in picking the gain alternative in an equity fund. In fact, even if you need the income, it is best to select non-dividend( rise) alternative and withdraw according to your own needs and schedule rather than according to the mutual fund’s own logic.It’s unfortunate that this belief is so deep and it has previous for so long. This renaming should have been done years, perhaps decades back. Certainly, the need for this renaming has been discussed publicly for a very long time. Even now, it’s quite clear that it will be some years before the period bonu is ultimately forgotten. Nonetheless , now that the formal renaming is done, at least versed mutual fund investors should move out of the bonu semblance .( The columnist is CEO, Value Research)
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