Investors of the HDFC Prudence Fund direct plan received a dividend of Rs 1.25 a unit in March. But investors in the regular plan of the same fund received a dividend of Rs 3 a unit. Similarly, in the ICICI Prudential Tax Plan, the direct plan declared a dividend of 1.5 per cent a unit, while the regular plan declared a dividend of two per cent a unit.
HDFC Mid-cap Opportunities Fund declared a dividend of Rs 1.75 for the regular plan in February but did not declare any dividend for the direct plan. Similarly, in January, ICICI Prudential Discovery declared a dividend of Rs 2.14 for the regular plan but none in the direct plan.
Data from Value Research says this is not a trend across mutual funds and schemes. It is specific to some schemes. The reason why some direct MF plans did not declare dividends or declared less was because of a Securities and Exchange Board of India rule that dividends can only be paid from realised gains, says Dhirendra Kumar of Value Research.
For instance, if the net asset value increases from Rs 10 to Rs 13, the gain is Rs 3. Earlier, funds used to pay a dividend out of these gains. Sebi has now said the dividend can be paid only out of the profits the fund makes, by selling shares and booking profits. So, if the fund makes a profit of Rs 1, it can pay dividends only out of that Rs 1.
The realised gains are higher in the case of regular plans than direct plans simply because the former have been around for longer. The direct plans were introduced only in January 2013; regular plans were in prior existence.
This does not mean a loss for investors in direct plans, as the NAVs of these are higher. Let us take the same examples. In the case of HDFC Prudence, the NAV is Rs 27.38 for the direct plan and Rs 25.25 for the regular one. For ICICI Prudential, the NAV is Rs 21.49 for the direct plan and Rs 19.19 for the regular one.
"Returns come from both dividend and growth. If dividend is lower for direct plans, the NAV is higher because of lower expenses, as compared to regular plans. Even if the dividend is lower in the case of direct plans, the appreciation in NAV is higher in their case," says Hemant Rustagi, chief executive officer, WiseInvest Advisors. "As the accumulated profits of direct plans will increase, they will also give the same dividends as the regular plans," said an MF manager.
In the long run, the difference in the dividends does not matter, for these are not really an indicator of fund performance. Due to lower expenses, the direct plans will always score over regular plans, says Rustagi. HDFC Prudence was launched in 1994 and ICICI Prudential Tax Plan in 1994. Both direct plans were launched in January 2013, when Sebi allowed fund houses to launch direct plans with lower expense ratios and offer a higher NAV for these.
If the take the same example, the expenses for HFDC Prudence the expense ratio was 1.69 per cent as on September 2014, while for the regular plan it was 2.25 per cent. while the direct plan was launched in Similarly for ICICI Prudential Tax Plan the expense ratio was 2.4 per cent for the regular plan and nil for the direct plan.