InvestorQ : What is the new SEBI rule on dividend plans of mutual funds?
Tisha Malhotra made post

What is the new SEBI rule on dividend plans of mutual funds?

Aashna Tripathi answered.
2 years ago

While these will not be effective immediately, it calls for clear nomenclature for mutual fund schemes and plans. Here are the highlights.

· SEBI has asked mutual funds to clearly distinguish between income distribution by way of dividends and distribution through systematic withdrawal plans.

· Investors often tend to believe that any distribution is made out of profits but that is not the case with many equity and hybrid plans.

· Systematic withdrawal plans or SWPs are so structured to take out income and capital gradually over time in a more tax efficient.

· However, the word dividend plan that deploys SWP model tends to mislead investors and builds false expectations in their minds about an assured return scheme.

· Investors often get confused and end up making sub-optimal decisions. This is not a good trend as SEBI wants investors to make informed decisions.

· Under the new mutual fund rules, SEBI has mandated that all mutual funds will have to rename dividend plans as “Payout of Income Distribution *** capital withdrawal option”.

· In the past, it did happen that quite often gullible investors bought into dividend plans of equity and hybrid products expecting regular payouts.

· In addition, SEBI has also mandated that the regular account statement sent to customers should also demarcate dividend and capital payouts.

The implementation will start later, but it will bring transparency.