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Mutual Fund unlocked: Mutual fund dividends

Nikhil Desai
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In the growth option, investors won’t receive any cashflow in the intermediate, also investor won’t receive any payments in the form of dividends, gains, bonus etc. Investor can get returns only on selling the units of the scheme. However, in the dividend option, investor receives returns at periodic intervals which are not certain.

If the investor's objective behind the investment is wealth accumulation, then he can choose Growth option. However, if the investor would like to receive dividend income at in a periodic manner, then he should go for Dividend option. For all the options that is Regular, direct, Growth and Dividend plans the investment objectives, portfolios & fund manager remains the same. Let’s see how the dividend on mutual funds are calculated.

Dividend is nothing but the distribution of gains and profits. All mutual fund houses/ AMC’s (Asset management company) calculate the dividends for each of their schemes on the basis of the distributable surplus. Distributable surplus is the surplus over the face value and unrealised gains of the scheme.

This is computed by subtracting the sum of face value, unrealised gains and accumulated Unit Premium Reserve (UPR) from Net Asset Value (NAV).

Distributable surplus = NAV – (Face value + Unrealized gains + Accumulated UPR)

Unit premium reserve is calculated by multiplying unrealise gain component in the NAV by number of units

UPR = Units * Unrealized Gain component in NAV

In March 2010, the market regulator SEBI has ordered mutual funds that for the declaration of dividend, funds should not use unit premium reserve. Prior to this it was observed that some of the fund houses/AMCs were paying dividends on the schemes from their unit premium reserve (UPR) instead of the realized gains. Realized gains are the gains which arises from selling of mutual fund assets. Due to this distributable surplus for each scheme plan changes so the dividend declared by same scheme in direct and regular plan may change.

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