Mutual fund dividends have been used in interesting ways in India. It is public knowledge that the dividends in mutual funds are not the same as dividends from stocks. Unlike dividends from stocks, mutual fund dividends are paid out from the fund corpus itself – any dividend then decreases the Net Asset Value of the dividend plan. However, many investors have the mistaken belief that mutual fund dividends are ‘extra income’. And frankly, many AMCs have played along. (This blog article argues against dividend plans.)
Recently Economic Times reported that a very popular scheme plans to stop fresh inflows into its dividend plans; inflows would be allowed in growth plans. (Read the article here.) The fund in question is the very popular, and well-performing, ICICI Pru Balanced Advantage Fund. As the quoted article says, the AMC has not officially confirmed this yet.
This short blog posts looks at the impact of this possible announcement.
Heft of ICICI Pru Balanced Advantage Fund
The fund has an AUM of almost 29,000 crores, as of Nov 2018. This is a large AUM for an equity-oriented fund, by any yardstick. And if you look at the performance of the fund, it is deservedly so. Per the AMC, “ICICI Prudential Balanced Advantage Fund is an open-ended dynamic asset allocation fund that can bring multiple benefits to your investments. It strives for growth balanced with safety by investing in equity markets as well as debt instruments.” The fund uses P/B value to vary allocation between equity and debt. When the the allocation is more on debt, the fund uses equity arbitrage to ensure that the ‘65% equity’ qualification is met. The AMC runs TV promotions that claim that this fund would keep you smiling through market ups and downs. The promotion is actually spot-on! A detailed analysis of the fund can be read in this freefincal.com article.
Dividend plans of the fund
At times past, the fund had promoted the dividend plans reasonably aggressively. To be fair, the fund page now suggests systematic withdrawals as the preferred way to get monthly income from the plan.
As of Sep 2018, the composition of the various plans was like this.
| Scheme NAV name | AUM as of Sep ’18 |
| ICICI Prudential Balanced Advantage Fund – Direct Plan – Dividend | 19,098 |
| ICICI Prudential Balanced Advantage Fund – Direct Plan – Growth | 1,95,866 |
| ICICI Prudential Balanced Advantage Fund – Direct Plan – Monthly Dividend | 28,271 |
| ICICI Prudential Balanced Advantage Fund – Direct Plan – Quarterly Dividend | 21 |
| ICICI Prudential Balanced Advantage Fund – Dividend | 1,75,789 |
| ICICI Prudential Balanced Advantage Fund – Growth | 19,21,936 |
| ICICI Prudential Balanced Advantage Fund – Monthly Dividend | 5,20,894 |
| ICICI Prudential Balanced Advantage Fund – Quarterly Dividend | 1,507 |
| Growth plans | 21,17,802 |
| Dividend plans | 7,45,580 |
The dividend plans made up almost 26% of the AUM. It is interesting to note though that the ratio of the dividend plans may have been declining. (It was 28% at the end of June 2018.)
Impact of the announcement
The fund has remained popular and its AUM has shown consistent increases. It is reasonable to expect that this would continue, particularly when the market is volatile. This announcement then means that the fund would accept inflows in growth plans, but not in dividend plans. A popular find shutting off the dividend plans has a good impact – on the overall market too. One could guess that the proportion of growth plans in the AUM would show a steady increase. I sincerely hope that this would also create a buzz in the market and spark much-needed debates on the futility of mutual fund dividend plans.
What do you think? Please share using the Comment box below.