Mutual funds have been successful in riding the current bull run. This is mirrored in the rising NAVS. The average annual returns provided by schemes having a relatively higher exposure to equity, has ranged between 40 to 70 per cent. This would have been reason enough for many unitholders to redeem their holdings and book profit. So far, however, the inflow seems to have outpaced redemption. And the mutual funds have provided good reason to ensure that investors remain invested.

All unitholders, especially those in equity-linked schemes, have started receiving dividend cheques of late. The dividends have come from the profit booking exercise, initiated by the fund managers. Churning of portfolio has also helped in shoring up the profit.

Says Ravi Sharma, chief marketing officer, Birla Sun Life Mutual Fund, "As markets have looked up, a fund manager is in a position to book profits in some of the stocks and share the bounty with investors." An asset management company can issue dividends from realised gain on a portfolio of a particular scheme and dividends received by the scheme from the companies as well. Birla Sun Life Mutual Fund has announced a series of dividends covering majority of its equity schemes in the last eight months to a year.

HOFC Mutual Fund, which was declared as a top performer by Strategic Capital Corporation, a Mumbai based broking firm, for its equity scheme for six-month period among all equity growth schemes has announced dividend on five of its equity-linked schemes. Investors to the scheme had got over 50 per cent during the six-month period. On a 12month period, the scheme had yielded 61 per cent gains.

UTI Mutual Fund, the largest fund house in the country with assets under management to the tune of Rs16,388 crore as of July 2003, has declared dividend for six of its schemes. In fact, the top 10 best performing funds' have notched up returns between 40-70 per cent over a one-year period. The returns over three to six months' time horizon has been even more impressive.

Even UTI Mastershares, which will be going open-ended soon, has notched up an impressive 28 per cent gain over a year. One of the most popular closed-ended fund from the UTI stable, Mastershares was due for redemption in September. It had given the unitholder an option of continuing with the scheme, which would become open-ended after the book closure this month. In a bid to induce unitholders the fund declared a dividend of 14 per cent.

The BSE Sensex, which has gained around 50 per cent over the last six months, has indeed come as a shot-in-the-arm for most of the equity fund managers.

Though declaring dividend affects the Net Asset Value (NAV) of the said scheme, the investors who were loyal to the scheme for at least three months gain, as then dividend is tax free in their hands. Most of the equity fund managers have been successful. 

At least those which had taken a high exposure to pharmaceuticals, banking and PSU stocks. They were able to notch up impressive performances in terms of NAV appreciation. Additionally, fund managers are of the opinion that most of the retail investors still perceive consistent dividend payout as a sure sign of good performance, irrespective of the actual performance of the portfolio itself.

"Declaration of dividends by mutual funds has several corollary benefits for investors. In the current context, there is the tax advantage as dividends are tax-free. Apart from this, in the case of equity funds, the fund manager has to book profits and hence compulsorily reorient and churn the portfolio," explains Ved Prakash Chaturvedi, chief executive officer, Tata TO Mutual Fund.

It is worth noting that dividends are tax free in the hand of unitholders, only when an investor has stayed with the scheme for at least 90 days to ensure against 'dividend stripping'.