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?

Answer
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Aashna Tripathi answered.
3 weeks 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.