September 26, 2016

The Dubious Rise of Monthly Dividend Plans in Equity Schemes

The last two years have seen significant inflows into equity-oriented schemes.  Their AAUM over the period April to June 2016 stood at a level of 92% above the AAUM over the same period, two years earlier (I’ve excluded arbitrage schemes).  But one set of plans among these equity-oriented schemes recorded an extraordinary growth: the monthly/ quarterly dividend plans.  From an AAUM of 897 crore over April to June 2014, the AAUM under these plans over the period April to June 2016 stood at 8719 crore.  That’s an astonishing growth of 872%!

So what explains the phenomenal interest in monthly/ quarterly dividend plans of equity-oriented schemes?

When I asked people in the know, the most common answer I got was: “rampant mis-selling”.  One of them called it “an open dirty secret”, and nearly all of them had stories to tell of someone or the other who got conned by the ‘growth plus regular tax-free dividend’ pitch.  Indeed, I have personally met/ spoken with a number of people who were made this pitch.  Fortunately, some of them were wise or lucky enough to not be taken in, but I know a few who got suckered.

But these plans have existed for years.  So what triggered the recent rise in their sales? 

To get the complete picture, we must go back to November 2013.  At the time, there were, in all, 29 such plans from 8 fund houses with an AAUM of 572 crore over the period July to September 2013.  Very little of these assets could be attributed to any marketing effort.  The two largest plans were the regular monthly dividend plans of ICICI Prudential Balanced Fund and Tata Balanced Fund which together held around two-thirds of the industry AAUM across all such plans.

It was around this time that the people at ICICI Prudential decided to put their marketing muscle behind promoting their other “Balanced” scheme: Balanced Advantage Fund.  This equity-cum-derivatives scheme had recently undergone its third name change (till October 2013 it went under the name of Volatility Advantage Fund).  They were particularly keen to promote its monthly dividend plan.  They had seen some positive results over the preceding few months (when the scheme was known by its previous name): in the seven months since the launch of the monthly dividend plan, it had grown to account for around 12% of the scheme’s total AUM of 626 crore (as on 31 Oct 2013).  Now they wanted to put more efforts behind it. 

Eight months later, there was a lot to show for their efforts.  From November 2013 through June 2014, the BSE Sensex went up by around 20%.  That appreciation, and the positive sentiment, led to the overall AUM of equity-oriented schemes increasing by around 30% over the same period.  In comparison, the AUM of Balanced Advantage Fund zoomed up by over 300%.  Among all its plans, the monthly dividend plans grew the most.  By the quarter of April to June 2014, those monthly dividend plans accounted for 18% of the scheme’s AAUM, and 42% of the industry AAUM across all such plans.

The sales success of Balanced Advantage Fund made other fund houses sit up and take notice.  And just as a few of them started to consider reviving dormant monthly dividend plans and/ or launching new ones, an unexpected event happened that catalyzed them into action.  In July 2014, debt funds were dealt a body blow by changes in tax laws.  In the wake of this, distributors started looking around for options to pitch as an alternative to debt funds, for investment horizons of less than 3 years. One of those was, of course, arbitrage funds.  But a set of fund houses and distributors saw another, bigger opportunity in pitching monthly/ quarterly dividend plans of equity-oriented schemes as a substitute for debt funds.  One banker whom I spoke to, described it thus: “It became the hottest game in town”.

As a reflection of that, by the quarter of Oct to Dec 2014, the AAUM of these plans shot up by 148% compared to a rise of 40% for equity-oriented schemes overall.  But that was just the start.  By the quarter of April to June 2015 the AAUM of equity-oriented schemes overall had risen by 66% from a year ago.  In sharp contrast, the AAUM of these monthly/ quarterly dividend plans had catapulted by 350%. 

The trend was also reflected in the number of such plans, and the number of fund houses who jumped on the bandwagon.  In June 2014, there were 33 such plans from 8 fund houses.  A year later, there were 68 such plans from 13 fund houses.  Currently, by my estimate, there are 96 such plans from 15 fund houses.  I don’t know what the other fund houses are thinking or planning: I can only assume that they have their reservations about having such plans.  Thanks to its first mover advantage and marketing push, ICICI Prudential continues to be the leader in this dubious market with a share of over 46% of the AAUM, based on last quarter’s data.

As I spoke to people in the know, I got to hear and see what fund houses had done to promote these plans.  I heard stories of “over-the-top” and “under-the-table” incentives.  I was shown in confidence, privately circulated material, all but assuring monthly dividends.  I saw one equity scheme being described as an “All Seasons Fund”.  In a confidential presentation to advisors, a top fund house made the case for monthly dividends in an equity scheme by showing the daily returns and volatility of the scheme.  I saw a slide where the presenter noted that the fund had, on an average, “added an alpha of 0.03 on a daily basis with a Beta of only 0.49”.

In the public domain, the evidence was rather bland.  One of the more striking observations was that the names of some of these schemes appeared to contradict the idea of having a monthly/ quarterly dividend option e.g. Reliance Regular Savings Fund, Tata Regular Savings Fund. 

But for me, nothing stood out more than the contrast between ICICI Prudential’s Balanced Advantage Fund and its debt-oriented MIP schemes.  (Emphasis that follows is mine)

ICICI Prudential has two debt-oriented MIP schemes.  One is called ‘Monthly Income Plan’ while the other is called ‘MIP 25’.  Each of these schemes has multiple plans, including monthly dividend plans, and quarterly dividend plans.  There is a bizarre irony in a scheme called ‘Monthly Income Plan’ having a ‘quarterly dividend’ option, but I’ll leave that aside for now.

In its official fact sheet, ICICI Prudential says that its Monthly Income Plan is suitable for those investors who are seeking:

A hybrid fund that aims to generate regular income through investments in fixed income securities with an aim to make regular dividend payment and seek for long term capital appreciation by investing a portion in equity.

In contrast, ICICI Prudential says that Balanced Advantage Fund is suitable for those investors who are seeking:

An equity fund that aims for growth by investing in equity and derivatives.

In that backdrop, when I compared the data for the quarter April-June 2016, across these schemes, I noticed a couple of things:

  • The monthly dividend plans of each of the MIP schemes accounted for about 15% of each scheme’s total AAUM.  In contrast, the monthly dividend plans of Balanced Advantage Fund accounted for 27% of its total AAUM. 
  • The combined AAUM of all plans of both MIP schemes stood at 1502 crore whereas the AAUM of just the monthly dividend plans of Balanced Advantage Fund stood at over twice that number at 3069 crore.  This is despite the fact that one of the MIP schemes has been in existence since 2000 while the other has been in existence since 2004.

To me, these numbers suggest that somewhere between ICICI Prudential, its advisors, and its investors, that message of suitability seems to have got lost.  Maybe it is because having a monthly dividend plan in an equity scheme is deceptive product design.  Maybe it is something else.

To be fair, this is something that all fund houses who are promoting these plans need to think about.  Investing 101 tells us that a scheme can be suitable for one of three primary purposes:

(a) short-term parking
(b) regular income
(c) medium/ long-term growth

While equity-oriented schemes are clearly suitable for purpose (c), by virtue of having a monthly or quarterly dividend plan, they attempt to be suitable for (b) as well.  But that begs the questions: Can any scheme successfully serve both purposes (b) and (c)? Would someone really benefit from regular income if it was highly unpredictable?

Suitability analysis is an inviolate necessity regardless of whether one is an advisor or a fund house.  Lest we forget, as SEBI puts it very eloquently, “sale of units of a mutual fund scheme by any person, directly or indirectly,” by “not taking reasonable care to ensure suitability of the scheme to the buyer” constitutes mis-selling.

Now that’s food for thought.

Note: Scheme data has been mostly sourced from AMFI. All AAUM data related to equity-oriented schemes overall excludes arbitrage schemes to the extent that I could.  Since AMFI has not consistently classified these schemes separately, the segregation had to be done manually and there is the possibility of some error.

Special thanks to Robin Jehangir for his inputs.

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