Beware of MF dividend declarations!

“XYZ Scheme is declaring 100% dividend and my distributor is telling me to invest in this scheme” . “This is important information which I have received from my relationship manager that ABC Scheme is declaring a dividend of 50%”. I come across statements like this every now and then where dividends declared by mutual funds are used as a bait to get investors to invest. The scenario is presented in a manner that if you invest Rs 1 lakh today, you will receive a Rs 30000 as dividend or some other amount based on the NAV of the fund. Nothing could be further from the truth.

Dividends are not any form of additional gains that you can expect. In fact, dividend in Mutual Funds is a function of Capital Appreciation. Let's say you invest on 20th September Rs 5 lakh at an NAV of Rs 50. This means you end up getting 10000 units (have excluded Entry load for simplicity).



 Rs. 500000


 Rs. 50

Number of Units


Dividend Declared

 100%  (i.e Rs. 10)

Dividend Received

 Rs.10 * 10000 = Rs. 100000




Happy aren’t you to receive Rs 1 Lakh as dividend. I wish it was this simple and easy to make money in just a few days . There would be far more billionaires and millionaires than we have now.

Now for the catch, after the dividend is declared the NAV of the fund falls down from Rs. 50.00 to Rs.40.00

Value of your holding = 10000*40= Rs. 400000. This along with the dividend already received of Rs. 1 lakh will translate into your original investment of Rs 5 lakh. So you see things are not as rosy as they are projected to be.



 Rs. 40.00

Number of Units



Rs. 400000

Dividend Received

 Rs.10 * 10000 = Rs. 100000

Total Amount in hand

Rs. 5000000 same as earlier





So how should one react to these advertisements that a 100% dividend is being declared or should anyone invest just on the basis of this information. The answer is an outright no. However, people have utilized a strategy called Dividend Stripping on the basis of this information. This was more rampant when Mutual Funds used to declare dividends a month or so before the record date.

The way it works is as follows. Suppose you have a short term gain of around Rs. 100000 . Instead of paying a short term capital gains tax of Rs. 10000 (considering 10 % short term capital gains), you make an investment of Rs. 100000 in a fund to declare a dividend of say around 25% (NAV= Rs. 25 ) .

Number of Units you have : 4000
Dividend per unit = Rs. 2.50 (25%)
Total Dividend Received : Rs. 10000
Value of your investment now : 4000 units * NAV (RS. 25-10%) Rs. 22.50 = Rs 90000
Redeem your investment now for Rs 90000 and you have a Rs 10000 Short Term Capital Loss.



 Rs. 22.50

Number of Units



Rs. 90000

Dividend Received

 Rs.2.50 * 4000 = Rs. 10000

Total Amount in hand

Rs. 100000 same as earlier





Here you have received tax free dividend and you have been able to offset this against your short term capital gains.

Now your short term gain is around 90000 instead of earlier Rs 100000. This results in a saving of around Rs 1000 or 10% for you.


Short term Capital Gain

Rs. 1,00,000

Loss from sale of investment post dividend

Rs. 10,000

Net Short term Capital Gain

Rs. 90000

Saving in Short term Capital Gains tax

10% of 10,000 = Rs. 1,000





IT Department through its annual budget have tried to fix this loophole by increasing the holding period of the investment post the record date based on whether it was bought 3 months before the record date or within 3 months of the record date.

SEBI on the other hand issued guidelines that required the AMC to issue a notice communicating the decision to distribute dividends within 1 calendar day of decision by the trustees. At the same time the record date should be 5 calendar days from the issue of this notice. Though these are steps in the right direction and dividend stripping has been slowed to a certain extent, AMCs in the race to gather more assets are still using this as a ploy.

Don’t fall for this or any such trick as your purpose of investing in equity oriented funds should be capital appreciation and not because a dividend is being declared. Dividend Payout, Dividend Reinvestment and Growth are options to choose based on your situation and need. Mutual Funds can only pay out dividends if they have made gains on the portfolio.  Dividends are like fruits on a tree…If you do not give enough time for the tree to grow…where will the fruits come from…Don’t know about this but your dividend will certainly come out from your principal.


Tax refund delayed? Use RTI to know why

Life just got better for millions who have ran from pillar to post for years to secure their tax refunds from the income tax (I-T) department.


In a landmark ruling, the Central Information Commissioner has passed an order which says information on refunds is covered under the Right To Information (RTI)  Act.

L Lakshmi Narayanan, an assessee, had filed an RTI petition with the (I-T ) department in Chennai, asking for information as to why was there a delay in the payment of his IT refunds for 2003-04, 2005-06, 2006-07 and 2008-09, amounting to Rs 3,32,457.

The department, however, refused to provide Narayanan the information contending that such information did not involve any larger public interest.

“The information sought is covered under Section 8(1)( e) of the RTI, wherein the information sought is not in larger public interest

and is purely personal in nature,’’ the department told the petitioner.

However, the appellant received refunds for 2005-06 and 2006-07 while he was seeking information. Following this, Narayanan filed another appeal to which the income tax department replied: “Information regarding issue of one’s own refund is necessarily a personal information, the disclosure of which has no relationship to any public activity or interest.’’

M L Sharma, the Central Information Commissioner, while passing the order, said: “To deny the appellant information sought by him under clause (e) or clause (j) of section 8(1) is nothing but misappreciation of law.”

The information sought by the appellant is covered under section 2(f) of the RTI Act and he has a right of seek information under section 2(j) thereof. It is clarified that the appellant has not sought any information which the public authority is holding in fiduciary capacity.’’

While directing the income tax department to disclose information for the inordinate delay, he also ordered the issue of refunds within three months. The CIC also rapped the department for failing to appear in a hearing arranged by the commission where the appellant was present.

Things you need to fill to complete I-T returns

The process of filing tax returns is underway for most individuals as the last day is fast approaching. The focus for individuals is to collect all the relevant documents such as the Form 16, TDS certificates and other information which is essential to complete filing of tax returns.

However, an important/critical portion of the Income tax return document which is the information to be provided called the 'Annual information return' (AIR) is given little importance and at times overlooked too.

I-T authority requires you to report certain transactions

The Income Tax authority requires you to report certain transactions which exceed a particular threshold during the financial year. It is only for reporting purposes. The thresholds have been defined. They are:

1. Cash deposits aggregating to Rs. 10 lakh or more in a year in any savings account by you

2. Credit card bill payments aggregating to Rs. 2 lakhs or more in a year 

3. Purchase of mutual fund units in any mutual fund scheme aggregating to Rs. 2 lakh or more

4. Payments made for acquiring bonds or debentures issued by a company or institution aggregating to Rs. 5 lakh or more

5. An investment aggregating to Rs. 1 lakh or more for acquiring shares issued by any single company

6. Purchase/sale of immovable property valued at Rs. 30 lakh or more.

Reporting exempt income

This information that the Income tax authorities' are seeking from you, is already available with them as your bank, credit card issuer, Depository Participant and Mutual Fund company would have already provided all details of your transactions to the Income tax authorities'. If your return is picked for scrutiny and the disclosure is not been made, then a penalty will be levied on you.

In addition to this, exempt income is another category of reporting which individuals tend to ignore. The logic being, if not tax needs to be paid on the same, then what purpose does it serve declaring exempt income. While the IT department may not require you to pay tax, they need you to report your exempt income.

Not reporting does not mean that the IT department will not be aware of the exempt income, by virtue of all entities/financial institutions reporting the transactions to the IT department, each and every transactions pertaining to you can be mapped. Hence it is best to report it in order not to attract the attention of the IT department.

Exempt income includes:

Exempt income includes dividend income (shares, mutual fund companies), long term capital gains on which securities transactions tax has been paid and income from agriculture not exceeding Rs. 5,000 among other things.

For the purpose of reporting, both the AIR and exempt income, you need to have all the documents in place such as bank statements, mutual fund statements etc among other things. So make sure you have these documents handy so that you can complete the process of filing returns with ease.

Make sure you complete the return form in every respect so that you do not attract the attention of the IT officer. Who wants their account to be picked for scrutiny? It entails mental stress coupled with paperwork – ensuring all supporting documents are in place.

Source: Economic Times

Invest in PPF and gold ETF for steady returns

The combined annual income of Neeraj Trivedi, 34, a software professional and his wife, 33, amounts to Rs 42 lakh, out of which, Rs 70,000 per month goes towards household expenses. In addition, the housing loan equated monthly instalment (EMI) entails an outgo of Rs 15,780.

Their investments include a child Ulip (unit-linked investment plan), mutual funds and equities. His goals include building a Rs 90 lakh-corpus by the time his son turns 18, buying a house worth Rs 1.5 crore by 2013 and creating a retirement kitty of Rs 4 crore.

Since they are a double-income family, the couple need to be individually insured at least to the extent of Rs 50-70 lakh each. Any shortfall should be immediately looked into and covered by a term cover for the next 20 years. The health cover seems to be adequate.

In terms of emergency, cash funds to meet unpredictable eventualities like temporary loss of income, a Rs 5-lakh-liquid corpus (preferably invested in higher-yielding liquid debt products) should be built. The balance Rs 5,00,000 in the savings account could be utilised for long- term investments.

While the family has a more-than-adequate cash flow, there needs to be a firm and consistent investment plan in place to maximise returns on earnings and thus grow the wealth corpus exponentially. Considering their age, they could look at building an asset allocation of 75:25 in equity:debt. For their debt investments, they could consider PPF in their and in the child’s name.

It should fetch tax-free return of 8% till maturity. Debt savings for the child could also include KVP, VI Year NSCs to yield 7.5-8%. For equity investments (CAGR of say tax-effective 10% p.a), a portfolio of well-diversified equity MF via SIPs should serve the purpose. One could also diversify into gold investments through ETF for the long term.

Child’s education (2028)
Their target is an inflation-a
djusted corpus of Rs 90 lakh. The child’s PPF account would yield Rs 26 lakh (assuming it is reinvested in 8% yielding products) after its maturity in 15 years. Assuming a return of 6.5% a year, the child plan should yield Rs 43 lakh in 16 years. For the balance corpus amount, he needs an SIP investment in a diversified equity fund (assuming post-tax 10% CAGR) of Rs 4,000 per month for the next 18 years.

Retirement (2030)
At the age of 54, he plans to retire with an inflation-adjusted kitty of Rs 4 crore. However, considering the couple’s current spending pattern, at an inflation rate of 6%, they need a corpus of around Rs 6.7 crore for their retirement (36 years of retired life considering life expectancy of 90 years).

After taking into account PPF investments (which would yield Rs 54.91 lakh collectively in 2030) and existing investments of Rs 15 lakh (which would grow to Rs 1 crore in 2030, assuming after-tax CAGR of 10%), there is a deficit of Rs 5.15 crore towards this goal. Investment in monthly SIPs in diversified equity assets to the tune of Rs 75,000 a month for the next 20 years should satisfy this purpose. There would be a monthly investment of Rs 25,000, which could be invested in equity SIPs.

Though they have a more-than-adequate surplus to repay the current home loan of Rs 17 lakh in one year, considering the fact that he enjoys a low interest rate on the housing loan (7.5%) and the return on long-term portfolio is 10%, we would advise him not to opt for pre-payment.

For funding his new house purchase, he has a surplus of Rs 1,50,000 a month. If he were to invest this in liquid funds (Rs 1,25,000 per month) yielding 5.5% per annum for the next three years, the corpus would grow to Rs 47.52 lakh in mid-2013. The remaining could be funded through a loan. For a 15-year-period, assuming an interest rate of 9% per annum, the EMI should work out to Rs 1,03,455.

While this plan is designed keeping the current income and expenses in context, with growing income streams, aspirational living and leisure expenses also increase exponentially.

The crux of any financial plan is to review and rework the same, keeping in mind the current expenditure and their effects on lifestyle and aspirations in the long-term.

Source: Economic Times