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Here is the question we posed:
Question: Is monthly/quarterly dividend based selling of equity oriented schemes mis-selling in your view?
Background: Dividends from equity oriented schemes (65% and above in equity assets) are tax free and offer a great way for fund managers to book profits in a rising market and give some money back to investors. In recent times, regular (monthly/quarterly) dividends from equity oriented schemes are increasingly being promoted as a key feature of these products. One view is that if the fund managers are confident about their ability to maintain a regular dividend payout, there is no harm in highlighting this feature in the sales process. The other view is that one should highlight only that which is sustainable over long periods of time, else we land up creating misleading hopes in investors' minds. People who hold this view remind us of the disappointments from MIPs and how long it took to get rid of those unpleasant experiences. What is your view on this and why?
Responses
Leading IFAs have sought broadly to break up the issue into two aspects: one is the concept of regular (monthly/quarterly) dividend declaration in equity oriented schemes (including balanced funds), and the second is the communication of such dividends to investors.
Camp A comprises IFAs who see no harm in the concept, but a lot of harm if this concept is mis-communicated. Camp B believes that the concept lends itself to being mis-sold and is against the spirit of the underlying asset class, and therefore should be discouraged.
Camp A: Concept fine. Not mis-selling, provided client communication is accurate
Vinod Jain, Jain Investment, Mumbai
If we tell clients that returns are not guaranteed and are based on performance... With that framework if someone invests with a view to create strong cash flow over period of time... So in my mind it's not Mis selling if informed well....
Mukesh Dedhia, Ghalla Bhanshali Securities, Mumbai
I wouldn't say its a gross mis-selling, but investors need to be properly educated that an equity oriented scheme cannot regularly pay dividends. If an assurance is given for dividend expectation, then it would be mis-leading clients and hence mis-selling.
Brijesh Dalmia, Dalmia Advisory, Kolkata
I won't say it is mis-selling. May be the intent is good but knowledge is weak. But we don't sell on this basis. If it is sold on dividend premise, it is not correct though. May be IFAs need more knowledge before they sell such product.
Deepak Chhabria, Axiom Investments, Bangalore
I won't go to the extent of calling it mis-selling, but if the primary selling pitch to the investor is regular dividend payout, then I won't hesitate to call it a miscommunication. This will attract a segment of investors to this category who desire regular returns, but may not be in a position to bear the volatility or forego dividends. This category of funds have gained prominence since the last couple of years, many schemes had accumulated profits, thus payouts were maintained. We are yet to see sharp and prolong market correction, it may not be possible for these schemes to maintain payouts during such periods, we are bound to face disgruntled investors, if they were attracted to dividends, without comprehending the risk. Unique proposition of equity as an asset class is growth and inflation-beating returns, focus on profit booking to pay dividends may be detrimental to growth.
Pramod Saraf, Swan Finance, Indore
We are selling dividend based products which are fitting to the investors portfolio need. It is not a mis-selling till the limit of its need in portfolio. We may say that any product if it is sold only because of selling something as per manufacturer's / IFA's choice or market momentum only, will automatically qualify to mis-selling. It is an option which was not so popular earlier and when got response in the market is the time to accept it with it's attached features which are good for some clients and bad too for few. Even I am a decade old promoter of MIP and still doing so with almost NIL disappointed client holding the same.
George Joseph, Bangalore
I would not term it as mis-selling, though it would be difficult for customers who being used to the frequent dividends, have the flow stopped due to an adverse turn in the market. This is on the presumption that the client has explained his needs correctly and market risks have been duly explained to the customer.
I generally advise my clients to invest in Growth schemes, unless they are looking at dividends for their cash flow needs. Therefore, the periodicity of dividend declaration does not generally have any impact on my customers.
I do advise my senior citizen clients to invest in MIPs, with a SWP option, as it is tax efficient and a relatively safe way to have a high cash flow with no or minimal tax implications and a low degree of risk.
N Krishnan, Value Invest, Chennai
It is not mis selling. But if the client insists we will definitely recommend the same. But it depends on the clients duration also. We are recommending the equity in growth option for all our clients.
Achin Jain and Nitin Awasthy, Client Alley, Dehradun
1. Client has to be explained very clearly that dividends doesn't mean booking tax free profits (as if markets went down your capital can also go down because you have invested in equity schemes) which most of the time client ignores and then problem erupts. We have experienced many banks / AMC guys / Advisors don't explain this in anticipation of doing easy business and it becomes a sheer mis-selling intentionally / unintentionally as the prima facie of risk involved in it takes the backseat in client's mind the way it is promoted.
2. Also if the above point is well addressed and equity risk part is well explained to customer then I think it is one of the tool of profit booking but this part can be managed better if we do monthly fixed SWP from load free profits accumulated esp in today's market as one is not sure of which direction the market'll move as we think that is more consistent then the longevity of rich dividends as that also can be anticipated max for 1/2/3 years and is not certain. If the dividend feature is the focus of promotion, it is of course more prone to mis-selling.
Ranjit Dani, Think Consultants, Nagpur
Using a feature to fulfil a need n highlighting it to hardsell a product are 2 different things. If it is the first with a disclaimer that the dividend might not come at all in 20-40% of the times, that's the way to do it. This cash inflow should preferably not be the only inflow for the client, there should be a strong base of inflows from debt n dividend inflows should be like tadka on dal n not dal itself. Otherwise it is a clear case of misselling. Also about fund manager's ability to consistently deliver quarterly dividends, CLEARLY EXCEEDING HIS BRIEF N OPEN AND SHUT CASE OF MISSELLING.
Mukesh Gupta, Wealthcare Securities, Delhi
We don't market based on monthly/quarterly dividend basis. If this schemes fit in asset allocation model and client also needs regular flows, only then we recommend with due caution.
Rashmin Deshpande, InSync Wealth, Pune
If the schemes are sold as assured dividends then it can be considered as mis-selling. If the clients is educated that the fund manager has no binding and there will be instances that he will skip dividends then it can be treated as a good tool to manage tax efficient returns with risk of downside associated but explained to the client.
Ankur Garg, Diva Jyote Portfolios, Delhi
It depends on what the clients want and on what basis was the product sold. Since our clients have bought equity as a long term product, we are not looking at this asset class from a view point of generating regular returns/income. Only in a few cases, typically in some older age group clients, has the dividend payout option been chosen so that these clients get some regular income. However, the communication is very clear that the dividend will neither be a fixed amount nor will it be regular. There is mis-selling where AMCs/Advisors have sold equity funds not on the basis of their performance but on the dividend payout %.
Camp B: Concept questionable. Highlighting regular dividends is mis-selling.
Bharat Phatak, Wealth Managers, Pune
I am concerned that this is a behavioural trap. Cashflows are being mistaken for income. There is a temptation to look at balanced funds and some equity funds as quasi fixed income instruments. If we look at the standard deviation and past drawdowns on some of these schemes in comparison to accrual oriented debt funds, the issue will be amply clear. It is one thing to use some balance funds in the asset allocation matrix to benefit from their tax efficiency on the debt portion. It is quite another to position them as 1% per month return instrument. The investor may form a notion that the capital is safe and he receives a regular income. It is possible that he is not paying attention to the market value of the investment which is expected to fluctuate. Will he be surprised if he sees the realizable value of his Rs.100 after 1 year at Rs.90? If the answer is "may be", I think it is our duty to make him aware of this possibility and let him make a learned choice about his investments. Cashflow does not have to be dividends, it can be created even through an SWP. But that is besides the point. Key issue is understanding the fluctuations and the risk appetite and risk tolerance of the investors. If there is a mismatch, it opens up the possibility that he will panic in a market decline and withdraw the money. He may then end up with an irreparable permanent capital loss on his capital, although the fund may do well over the long term. It is important to avoid this pitfall.
Shrikant Bhavagat, Hexagon Wealth, Bangalore
Regular dividends are not sustainable in a volatile asset. Simple logic. Any such talk of regularity will result in mis-selling by ignorant and ill-intentioned distributors.
Shyam Sekhar, I-Thought, Chennai
Monthly dividends from equity schemes is not a bright idea. It is mis-selling. An investor must not choose monthly dividend paying equity schemes as an alternative to debt. That is ill-advised. Equity schemes should attract only those monies an investor may not require in the near term. Only money that can be put away to grow faster and be available over the long term should be channeled into equity oritened mutual funds. Or, else the MIP fiasco will possibly recur in equity funds.
Sangeeta Jhaveri, Prescient Financial Solutions, Mumbai
You are absolutely right. There is widespread mis-selling happening by promising monthly dividend for a period of 2 to 3 years at a particular rate. In fact some disributors are selling this product as better yield than a fixed deposit with banks without explaining the downside in equity over a long period of time. Due to such mis-selling investors have a negative experience and hence they refrain from investing in mutual funds the next time around.
Nipun Mehta, Chennai
WE HAVE NEVER SOLD TO OUR CLIENTS FOR DIVIDEND PAYOUTS, AS DIVIDEND IN MUTUAL FUND IS A MISNOMER, DIVIDENDS ARE NOTHING BUT PAYOUTS FROM CLIENTS INVESTMENTS RATHER THAN EARNINGS FROM YOUR MONEY, WHEN SOLD TO THE INVESTORS AT THE TIME OF DIVIDEND PAYOUT, IN THE LONGER TIME FRAME ALSO WE HAVE HELD THAT GROWTH PLANS WITH SWP ARE BETTER FOR WEALTH CREATION RATHER THAN DIVIDEND PAYOUT PLANS
Ashwani Tiwari, WealthMate, Jalandhar
I firmly believe that monthly dividend and quarterly dividends in equity schemes are simply a bad idea. When one is investing in an asset class which has a high volatility and there is no doubt about it that equity markets are and will always be volatile so how can one consider a strategy of providing regular outflows in form of dividends? I do merit an annual dividend which can serve as important inflow for a client who has limited inflows and for that matter provide fund manager a convenient way to reward the investors through the scheme surplus.
Ashish Modani, Jaipur
It is nothing but sheer mis-selling. Equities are tool for wealth creation and not income creation. And by giving dividend option and telling clients that you will get dividend, we ourselves are creating a big pit for ourselves.
Vineet Nanda, Sift Capital, Delhi
I believe there is a bit of mis-selling as clients don't understand or are not told that in bad markets conditions dividends mean basically erosion of capital value. Most investors may not be comfortable with this and think dividends are only coming from profits over and above the capital invested. Most AMCS over last 3 months have pushing PMS and Balanced Funds. My past experience tells me that this is always a precursor to pain ahead
Bharat Bagla, Bees Network, Kolkata
I just don't subscribe to this idea. I am yet to meet a client who would need a monthly dividend from an equity fund. What kind of need analysis are wealth managers doing? What kinda vigilance is the regulator doing? I personally think this should be banned immediately
Mona Fakih, Allegiance Advisors, Mumbai
We wouldn't use dividends received from equity funds, as a strategy to sell the asset class. That in our opinion would be not being in integrity ...
Raj Talati, ABM Investments, Vadodara
Very rightly said, it is mis-selling and I don't think any fund manager however confident he might can assure such dividends and if still someone does, I think investors money should be redeemed immediately from such funds.
The dividend options selected by investor in 2008 in many of the schemes are yet to recover their capital.....How can we suggest Equity oriented schemes for regular income when we know it can have rough patch in between and don't know how much longer it can be.
Think of a situation if such fund is given to a retired client. Market enters in a bearish phase, fund house will keep on giving dividend @8-9% (To maintain dividend yield) but what will happen to his capital and retirement......
Ramesh Hegde, Davangere
I agree with you it is purely miss selling. This will be utilized for replacement of NFOs. They say in their prospectus if surplus available then only they distribute the dividend. There is no guarantee for equal dividend. So I recommend to my client to go for SWP to get equal amount and for consistent pay outs.
Rajul Kothari, Capital League, Delhi
Yes. We do not feel it is right to sell Equity/Balanced funds with the promise of regular dividends as the underlying asset is of a volatile nature. The clients do not understand that if the fund value actually falls in the first 1-2 years (or later also) and if the fund continues to give dividend, they are actually withdrawing their own capital. This kind of mis-selling is tantamount to selling new funds with the attraction of a 10 Rupee NAV! Today, more than ever before, it is important to gain the confidence of the investor and educate them rather than mislead them with these gimmicks. For clients seeking regular income, Financial Advisors can create tax efficient plans which do not dip into growth part of portfolio for a min of 3 years to create a buffer and create income stream by way of tax free income/regular withdrawals from fixed income and liquid options.
D Muthukrishnan, Chennai
This is clearly mis-selling. The sales pitch is that the investors would continue to receive dividends month after month or quarter after quarter. Markets would always be cyclical. Gut wrenching bear markets are part of life. Promising something in perpetuity, when it is not possible to do so, is a clear mis-selling.
Sandeep Gandhi, Mega Financial Planners, Rajkot
As an industry we are very much fond of repeating our mistakes. As mentioned we have a very recent record of MIP, still we want to do the same mistake with higher equity allocation product. If you remember one AMC had an advertisement of 107 monthly dividend pay-out ( I recall up to 107 it may have been higher) and then….
AMCs want market share, but we as distributors are also equal culprit. We are marketing it against the post MIS or bank FD. We need to highlight that currently scheme is able to pay and can even tell them that it is possible for say next 22 months, 48 months' time frame depending upon the booked profit available with the scheme. We need to highlight that still your investments amount may dip to market corrections and may see the appreciation if the markets rally.
Even after explaining it orally now I am writing it on a paper and delivered it with the file. We need to explain the risk factor and sell the option in a right manner, because then only we may go ahead hand to hand with investors.
Sashidhar, Wealthcare Investment Advisors, Hyderabad
Yes, its definitely mis-selling. People are recommending balanced funds, showing monthly dividends. What happens if markets correct by 20%? I think SEBI should mandate funds to declare dividends out of the earned profits made during that particular year and not from the reserves or earlier profits.
Javahar K P, Enhance Money, Bhopal
Monthly/quarterly dividend option is a mere attention seeking strategy of AMCs concerned. We don't advocate this kind of short term method. As there is clear cut instructions regarding dividend payouts from the regulators, the monthly, quarterly and half yearly payouts options of the schemes of fund houses are to be discouraged.
Hari Kamat, Panjim
I have learn from my past experience the best way to choose the dividend option only if the client requires. I never opted for convincing clients to invest few days before the dividend record date. In fact I used to postpone the investment after dividend record date.
I have been always promoting Systematic Withdrawal Plan for MIP's & few Balanced Funds. Past Experience with this options is over last 7-8 years is very pleasing & tax efficient.
Jignesh V Shah, Surat
My advice is go for SWP, rather than Monthly or Quarterly dividend. Start SWP after adjusted with time of after 6 months or more. Not possible in dividend option. Or wait for 1 year for start SWP from Equity based scheme, and for first year swp from Liquid scheme. IF FUND skip any dividend or reduced the dividend amount its turn in to disappointment. so in my view SWP is better than dividend options.
Viksit Rohatgi, Blue Circle, Delhi
I agree with the other view that one should highlight only that which is sustainable over long periods of time, else we land up creating misleading hopes in investors' minds. Actually equity is much higher volatile asset class than MIPs and the recovery cycles may be much longer. During periods of sharp corrections/ bear markets, there can be huge capital erosions. It is quite likely that in bull markets the sales pitch positioning Equity Asset Class for regular dividend income flow becomes a simple tool for investors to get mislead/ misunderstood. The very fact that Equity is a long term investment asset class is often forgotten by the investors and in most cases investment decisions are based on recent dividend payout presentations. The importance for the concept of asset allocation gets thrown out of the window. The fact is quite evident from recent past post changes in DDT and taxation for Capital Gains on debt investments when immediately huge MIP/ Debt corpus got shifted to Arbitrage and Balanced Funds quite understandably mainly for vested interests of a few advisors.
Kapil Khurana, Amritsar
It is a total mis-selling going on in case of dividends from balanced funds as these clients are never told about the under lying risk they are exposed to & you have rightly pointed out MIP scheme's fiasco in the past.
To conclude
Opinions, as can be seen, are varied about the utility of the concept - about whether monthly/quarterly dividends in equity oriented funds serve a worthwhile purpose or only serve not-so-laudable objectives. But what comes through clearly is the need for distributors and advisors to ensure clear communication of what regular dividends mean and what they don't. The last mile access to investors are distributors - the buck finally stops with you in terms of what is the message you choose to take to your clients and why. Let's all make sure that we don't slip up on this. Let's ensure we are putting our investors interests first.
Which camp are you on? Do you believe the concept of monthly/quarterly dividends in equity oriented funds should be discouraged in the industry? Or do you believe they serve a useful purpose? Should we be wary about sustainability of indicated dividend rates, or are we worrying too much about a non-issue? Share your thoughts with fellow distributors and advisors by posting your comments in the box below - its YOUR forum!
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