Mutual Fund Frequently Asked Questions

Here are some mutual fund FAQ for the investors

Q1. What changes are being introduced in the above SEBI circular regarding the dividend option of mutual fund schemes?

A1. As per the abovementioned SEBI Circular, whenever distributable surplus is distributed under a Dividend Plan, the AMCs are required to clearly segregate and disclose (i) income distribution (appreciation in NAV) and (ii) capital distribution (Equalisation Reserve) in the Consolidated Account Statement (CAS) provided to the investors.

SEBI has also stipulated that all the existing and proposed Schemes of Mutual Funds shall name/rename the Dividend option(s) in the following manner:

Q2. What is the purpose of the above regulatory directive?

A2. The regulatory intent of the regulatory directive is to clearly communicate to the investors that, under the Dividend Option of a Mutual Fund Scheme, a certain portion of the capital (Equalization Reserve) can be distributed as a dividend. Accordingly, the SEBI circular requires Mutual Funds to rename Dividend option(s) as per the above table.

Q3.What is the effective date for implementation of the above change?

A3. The above provisions are effective from April 1, 2021 for income distributed under ‘Dividends Option/Plan’ of a mutual fund scheme wherein the Record Date falls on or after Apr 1, 2021.

Q4.What about the break-up of dividend distribution made in the past ?

A4. The aforesaid disclosure of break-up of dividend distribution shall be only for dividends declared on or after April 1, 2021 and not for dividends declared prior to Apr 1, 2021.

Q5. Are there any income-tax implications for the mutual fund investors due to the above regulatory provisions?

A5. Currently, dividends distributed by a mutual fund are taxable in the hands of investors as per applicable tax rates. There is no further guidance available on the impact, if any, of the revised disclosures on taxation in the hands of investors. Investors should consult with their tax advisors for any further questions related to tax.

Q6.Would there be any changes in the calculations in the capital gains statement?

A6. No. Please refer to the response to Q # 6 above.

Q7. Would there be any changes with respect to TDS on dividends?

A7. No. There will be no changes and TDS on dividends would continue to be deducted on the entire sum distributed, as done currently. Refer response to FAQ 6 above.

Q8. What should the Scheme name be on the cheque/DD for purchase transactions under the dividend option/plan?

A8. If the full name of the scheme, including the option, is written on the cheque / DD, then the new naming convention should be followed, i.e., ABC Mutual Fund—Regular—Weekly IDCW*.

*Investors are advised to refer to the instructions in this regard in the respective Scheme Information Document (SID) or Key Information Memorandum (KIM) on the website of the concerned mutual fund or contact their investment adviser / MF distributor or the concerned AMC in case of any queries.

Q9. What is the implication on the cost in case of transmission/Scheme Merger/Segregated portfolio? What is considered cost?

A9. There will be no change in cost in case of transmission/Scheme Merger/Segregated portfolio.

Q10. How will the above naming convention be reflected in the CAS and MF Account statements?

A10. Please refer to Table 1 below for details

(*) Please note: TDS will be deducted @ dividend tax rates applicable both for Income distribution and Capital distribution "#" will be suffixed to IDCW, and the expansion/full name will be provided below The revised scheme nomenclature will be applicable for all historic transactions as well

(Source: AMFI)

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