The dividend re-invested in ELSS is locked-in for three years which is creating confusion among investors.
To avoid confusion in the minds of investors, AMFI has asked AMCs to discontinue dividend re-investment option in ELSS schemes at the earliest.
Since dividends are re-invested in the scheme, the units get locked-in for three years. Although AMCs mention this fact in the scheme information documents (SID), investors tend to forget to click on dividend payout sub-option while filing application forms due to which dividends are reinvested by default.
“Since the original amount invested qualifies for deduction under 80 C, even though the dividend reinvested does not qualify for any such deduction, the lock-in period rule is often misconstrued by investors, who expect to withdraw the entire balance units (including divined reinvested) after three year lock in period of the original investment. Thus, investors who wish to withdraw the entire balance of units (including dividend reinvested) after three year lock-in period of the original investment cannot do so, due to lock-in of each transaction of dividend reinvestment, leading to investor grievances,” states AMFI’s best practice circular dated January 09.
This matter was discussed by SEBI with AMFI recently. After examining the issue, the AMFI committee on Operations and Compliance recommended that dividend re-investment should be discontinued to avoid any confusion in the minds of investors.
Soon, all ELSSs will come with two options – growth and dividend payout. In future, dividends will be credited to the bank account of the investors. Consequently, the SIPs that were registered under the re-investment option will be processed under the dividend payout option.
AMCs will convert the outstanding units under dividend re-investment option into dividend payout. Investors who do not wish to receive dividend payout can opt for a dividend transfer plan (DTP) through which they can invest the dividend in any open end scheme within the same fund house.
Some AMCs have already discontinued dividend re-investment options in their ELSS schemes.
