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Personal Finance

Birla Sun Life Tax Relief 96 – beware of dividend pushers!

A number of mutual fund distributors and advisors are hard-selling Birla Sun Life’s Tax Relief 96 scheme, saying that they will give 1000% dividend in the next four months! Check out one blogger who has mentioned it, and innumerable forums in Orkut and Online groups that peddle this information.

Beware of such dividend pushers. Let me tell you what is good and what is bad about this situation.

What are they pushing?
That this mutual fund will pay out Rs. 100 (1000% of the face value of Rs. 10) as dividend. The NAV on December 1 was about Rs. 194, which, after the dividend would come down to Rs. 94 or so. But the dividend was not a one-shot dividend: It would be given over four months. 1st 250% was in december, and then 250% over Jan, Feb and March 2007.

Promptly, Birla Sun Life announced a 250% dividend on December 4, 2006. The record date was December 8, so you could purchase the fund till that date and receive the dividend.

Now why is it supposedly a good buy?

Because if you need to save tax under section 80C, you can lock in Rs. 100,000 in a tax saving mutual fund for three years. To many people, this is a lot of money to keep locked in.

So if you invest Rs. 100,000 at an NAV of Rs. 194, and get back Rs. 100 as dividend, you are technically getting back Rs. 50,000, and enjoying the tax benefits on the full 100,000. That is good stuff, isn’t it?

So how does the distributor benefit?
Simply by getting more commissions. Firstly funds offer commissions on the money invested (2.25%) and then they pay the distributor on every year that the money stays with them (minimum three years, usually 0.5% or so each year). Obviously, this is great news for distributors, so they will peddle this fund. The blog I mention even uses wrong mathematics, by assuming at the end that your initial investment stays the same, and you get dividends. The initial investment comes down by the amount of dividend paid, so net-net you are in the same position.

Why would Birla Sun Life do such a thing?
Before this announcement this scheme had only Rs. 59 cr. as assets. Now this is a very small amount, and fund managers get paid as a percentage of assets managed. Therefore the only solution to make more money is to increase the assets managed; So they can tap on the traditional Indian investor mentality of loving dividends regardless of what it means, and can announce such a scheme. In fact it has worked! From 59 Cr. on November 30, the fund size has grown to Rs. 194 cr. on December 31 – an increase of 134 crores!

Remember, making money is not at all a bad thing, and I encourage them to do so. In fact this scheme has certain good things about it which I will mention later. But there are some very bad things too.

Firstly, announcing dividend for four months later is ILLEGAL. SEBI rules state that you can announce a dividend only five days before the record date. Birla Sun Life has never revealed that they will pay such a huge dividend – only their distributors have – so technically, they are absolved of any blame.

Secondly, for you the investor, if you invest in this fund, you can never be sure that they will announce this dividend! If you are depending on the dividend to meet money requirements, you’ll have to wait and hope and pray that they do make this announcement. Think about it, it’s your own money and you are hoping and praying that they will give it to you. Not a good situation to be in.

Thirdly, dividends in mutual funds are not the same as dividends in stocks. Read my Introduction to mutual funds article to understand how dividends work. So advertising a fund as “great dividend” is no big deal, it’s your own money they are giving back. Stocks on the other hand can give you money which is not factored into the price, so for stocks dividends do add value. Not so for funds.

Finally, the concept of 1000% dividend is ridiculous. You may think that this is 1000% of your money. It is not. It is 1000% of the face value, which is Rs. 10. The current price may be hugely different.

What is good about it?
Well, let’s assume that they really do declare Rs. 100 as dividend. If you had invested before December 8, you’d get Rs. 100 back out of the Rs. 194 paid for the fund. That means you would have half your money back, but enjoy the full benefit of the 80C deduction. So let us say you have only invested Rs. 50,000 in 80C products, but have only Rs. 25,000 left. If you had invested here, you can borrow another Rs. 25,000 temporarily (from your friends or family), put it in this fund and by March you will get Rs. 25,000 money back and you can return it. But that rests on too much hope that they will surely declare the dividend and so on. Scary.

Also the remaining money is invested in the fund, right? So how is this fund? Is your money safe?

Birla took over this scheme from the erstwhile Alliance Mutual Fund. Therefore fund management has changed (in early 2005). In the last year, the fund has returned 31%, which is far lesser than the Sensex, but much better than most other tax saving funds. In fact, as of today Value Research Online’s ranking check shows it as 3rd in the category for 1 year returns. So perhaps the management change has really helped, and I think your money will be in good hands.

So what do I do?
They have not yet announced any dividend for January. Let me ask you to only act when they announce a dividend, not earlier. You will get five days after that announcement (usually), to be able to buy – they will also announce the record date when they announce it.

If they announce a Rs 25 (250%) dividend in January, ignore it – do not buy. Current price is about Rs. 167, which will then fall to around Rs. 143 after the record date. Then in February, if they announce a 250% dividend, ignore again, do not buy. The NAV will go down to about Rs. 120. (Assuming there is no growth in the fund at all, for simplicity’s sake)

Later in March, if they announce the last 250% dividend, then go ahead and purchase it. At a price of Rs. 120, you will get back Rs. 25, which means if you put in Rs. 100,000 you will get back Rs. 20,000. This is not as good as the distributors promised, but it is risk free, because you buy only after the last announcement and before the last record date.

But I wish Birla Mutual fund announced one big dividend, rather that four installments. It’s stupid to do this four installment business, and very investor unfriendly.

  • Anonymous says:

    >Hi Deepak,

    Excellent Post.What are your views about Sundaram small cap NFO?

    Thanks,
    Anshul

  • Deepak Shenoy says:

    >Anshul,

    Not a great idea.First, it’s a closed ended fund. Limit of 300 cr. total investment. You can’t redeem more than 10% of your holdings per year. 3% to 0.5% exit loads over the first five years.

    Small caps are HUGELY risky. For every success story there are 20 failures. Closed ended means no one else can invest. Exit load plus redemption limits means you can’t get out.

    A better strategy is, if you have faith in the mutual fund being able to find good companies, you can wait for their first portfolio report and invest in the same companies that they invest in. Simple. They expect you to stay long term, so I am assuming they will invest for the long term and not churn their investments a lot – so if you pick what they have picked, you get the upside and you don’t have the redemption limit problems etc.

    Skip this fund. Anyway the NFO is a waste of effort – closed ended NFOs are not worth it.

  • Alok says:

    >hello deepak.

    its nice to see ur review abt brila sunlife tax releif 96.

    can u tell me abt kotak wealth builder series-1. i have been to there meet in mumbai.. where they tried to convince on that even its a debt fund it would work like a equity. they r deploying 30% in eqity derivatives which they say would perform extreemly good as there software back testing have shown amazing result.

    should i invest in this product?

  • Anonymous says:

    >I would rather use this approach….
    Its 3 years locking period for this fund…Lets say i invested X amount of money 2 months ago – if you would have your money would have been appreciated by 25% by now…+ you received dividend, don’t consume it – buy back units again, same in case of Feb, March, April Dividend if it happens.

    Now after that, see the power of cumulation – tell you after 3 years you’ll end up a good amount of return from this fund.

    Well do not curse fund – depends on people need to need & perspective..but still a good try & good finding. Appreciate your sharing. 🙂

  • Anonymous says:

    >pls. advice in case if I wish to invest 1 lakh in Mutual Funds for longer duration (4 to 5 yrs) should I go ahead or should wait till there is some correction in the market.

  • Anonymous says:

    >pls. advice is it correct time to invest in lumpsum in mutual funds or will SIP be a better option.

  • Deepak Shenoy says:

    >Anon: I wish I knew the right answer. Here’s a suggestion: you want to invest, but you think the markets will correct, no?

    So what I can suggest is: Wait for a month. If the market falls, invest. If it doesn’t fall, invest anyway because heck, how long can you wait?

    Unless you are in tune with the market on a regular basis, you shouldn’t attempt to time the market. Having said that, I personally feel that this is not a market worth putting your money on for the next few years. But that opinion can change anytime, since the market is king.

  • ankur says:

    >Please advice on the SBI Magnum Tax Gain 93 and Reliance Equity Advantage Funds as I wish to investment approx. 50K in each of these mutual Fund schemes.

  • Anonymous says:

    >Hi

    I'm new to MF. I want to start investment Rs 2000 per month in any one of the following funds through SIP. Can you suggest which one is good.
    SBI Magnum Contra
    HDFC Equity/ Top 200