Why WhiteOak Capital’s new fund doesn’t offer a dividend option

Most active mutual fund schemes – equity, debt or hybrid – offer dividend and growth options. While the growth option is used by investors keen on long-term compounding of money, the dividend option is used by investors who are keen to get cash periodically from their investments.

There’s something peculiar about WhiteOak Capital Multi Cap Fund (WMCF), launched on August 31: It does not have a dividend, or income distribution cum capital withdrawal (IDCW) option. It comes with only a growth option.

This is the third such launch by White Oak Capital Asset Management, ranked 31 among India’s fund houses. White Oak Capital Multi-Asset Allocation Fund (launched in May 2023) and White Oak Capital Balanced Advantage Fund (launched in February 2023) also came with just the growth option; no IDCW (dividend) option.

To be sure, this is not the only fund house to skip the IDCW option. PPFAS Mutual Fund also does not offer a dividend option in its flagship scheme – Parag Parikh Flexicap Fund. Will investors miss something if they invest in a scheme without a dividend option?

IDCW or dividend plan

Most active mutual fund schemes – equity, debt or hybrid – offer dividend and growth options. While the growth option is used by investors keen on long-term compounding of money, the dividend option is used by investors who are keen to get cash periodically from their investments.

In April 2021, the nomenclature ‘dividend’ was changed on the direction of the Securities and Exchange Board of India, the capital market regulator. Dividend was renamed distribution and dividend plans were renamed IDCW options.

A fund house may declare a dividend at periodic intervals – annually or quarterly. Debt funds can even have daily, weekly and monthly distribution frequencies.

Of course, fund managers are not bound to declare a dividend. If they realise a profit, they may declare a dividend. Put simply, the quantum and timing of the IDCW cannot be forecasted and an investor cannot rely on it for income needs.

Taxation

Dividends declared by mutual fund schemes are taxable in the hands of the investors. The post-tax returns of investors in higher tax slabs dwindle when dividends get taxed.

But if an investor keeps his money in an equity fund and withdraws it after one year, then the capital gains booked are taxed at 10 percent if they exceed Rs 1 lakh in a financial year. Thus an investment in a growth option can be more tax-efficient for many investors.

Dividends and capital gains booked in debt funds, however, are taxed at income tax slab rates. Dividends are also subject to tax deducted at source at the rate of 10 percent if the dividend amount exceeds Rs 5,000.

“Cashflows received by selling units in growth option is tax-efficient compared to dividend receipts,” said Chirag Patel, co-head-products, WhiteOak Capital Mutual Fund. “An investor can sell units as per his choice and customise cash flows. The timing and quantum of the dividend is not in the control of the investor. Our experience with first three scheme launchesmade it clear that most of the investors preferred to invest in growth.”

Cash flow management

A dividend declaration does not mean that the investor has necessarily made good returns. For example, an investor enters a mutual fund scheme at an NAV (net asset value) of Rs 50 and the NAV falls to Rs 49 due to stock price movements. The scheme declares a dividend at the rate of Re 1 per unit. In this case, the investor is in a marked-to-market loss but has received a dividend of Re1 per unit, which is taxable in his hands.

On the other hand, a systematic withdrawal plan in an equity fund is a good way, comparatively, to ensure some cash flows if that's what you really want. But remember, withdrawals in first year will result in short-term gain or loss. Withdrawals made after one year will either result in long-term gain or loss.

As per mutual fund norms, a scheme can declare dividends only when the fund manager books a profit. This may force a fund manager to sell stocks quoting in profits and lead to a situation where the scheme sells winners prematurely.

However, some fund houses have used the dividend option tactically. In 2013, ICICI Prudential, IDFC (now Bandhan) and Sundaram sensed an opportunity in the form of an impending rally in the stock market.

At that time, close-ended funds with a dividend option were launched to pocket the gains. The idea was to capitalise on a finite period trade and the fund manager would book a profit as stock prices surged and return the money to unitholders.

At the other extreme was Quantum Long Term Equity Value Fund. This flagship scheme of Quantum Mutual Fund, India’s 35th-largest fund house, has never declared a dividend. Due to reinvestment of exit loads, the NAV of the IDCW option is higher than the growth option of the scheme.

Christy Mathai, fund manager-equity, Quantum AMC, said an investor is best served in a growth plan, where one enjoys compounding for a longer time horizon. A typical investor whose objective is long-term compounding is exposed to significant re-investment risk in case of a IDCW plan.

“An investor should not be looking at IDCW plan for regular dividend payout as dividend is not guaranteed and is at the discretion of the fund house. If an investor is looking for regular income, she is best served by a systematic withdrawal plan (SWP) or simply selling a portion of holding as and when the need arises based on her own requirements,” he said.

What should you do?

Though investing in a growth plan is clearly a winner while investing in equity funds, you can consider investing in the dividend plan of debt funds if you are keen on a dividend transfer plan. A dividend transfer plan uses the dividend amount to purchase units of another fund. Some risk-averse investors use it to purchase units of equity funds at regular intervals without risking their capital.

In most other cases, it makes sense to go for a SWP to earn some sort of regular income or just sell units as and when the need for cash arises.

So, the next time you feel like searching for ‘the best dividend paying mutual fund schemes,’ you know the truth behind dividends.