Fund Dividends

ELSS fund dividends provide liquidity to investors, but watch out for the underlying maths

Many investors prefer investing in tax-saving mutual fund schemes, or equity-linked savings schemes (ELSS), just before the end of the financial year to pocket a dividend. Some investment advisors also recommend this option because it eases the financial burden on investors and allows them to take money out of the scheme even within the mandatory lock-in period of three years. However, this may not be the right investment approach if one is investing in equity to build long-term wealth.

ELSS typically declare dividends in the last quarter of the financial year. In 2015, 15 out of 38 funds have declared dividend. The table gives the latest NAVs and yields of the 15 ELSS funds.

Dividends, of course, provide much needed liquidity to investors who are short on funds. There is always a gap between declaration of dividend and the date of dividend. Some investors invest just after a fund declares dividend to pocket the dividend in a few days or weeks. These investors and their advisors believe that the method enhances the total returns after tax. They opt for the fund that has declared the maximum dividend while investing their money. Again, this is a wrong way of looking at the performance of the scheme.

This is because the highest percentage of dividend need not be the highest dividend yield. Dividend yield is the ratio of dividend declared by a fund per net asset value (NAV) of the fund, while the dividend percentage is based on the face value of one unit of a fund. A higher dividend percentage is misleading as it gives investors a perception of a high dividend amount received and higher dividend yield.

Decoding dividends