Money managers, who have historically used dividends as a ploy to lure investors to tax-saving stock funds, are shying away from payouts this year, as a savage share market decline limits distributable surplus.

Only seven tax funds have announced dividends in 2008/09, compared to 20 last year.

The March quarter, which typically sees hectic activity as most Indians rush to save tax, has seen only four funds declaring dividends so far, down from 17 during the same period in 2008, according to data from fund tracker ICRA Online.

"Equity schemes have not given dividends mainly due to the equity market fall and the non-availability of distributable surplus," said A Balasubramanian, chief investment officer of Birla Sun Life Asset Management.

"It's a function of (stock) markets," he added. Tax-planning stock funds are diversified equity funds with three year lock-in period and enable tax benefits on investments of up to Rs 100,000 a year.

Hit by foreign fund outflows and a sagging economy, the BSE Sensex plunged more than half in 2008, hammering net values of tax funds down an average 55 per cent.

Tax funds have lost almost a tenth of their values so far this year, shrinking assets under management to Rs 111 billion at February-end from Rs 160 billion at the start of 2008/09, limiting their ability to distribute dividends.

DULL COLLECTIONS

Asset management companies in India usually declare dividends, launch new tax funds and other promotions in the March-quarter to attract investors who rush to complete their tax-saving formalities before the fiscal year ends.

But a sharp fall in portfolio values has damped sentiment this year, leading investors to alternate investment options.

Tax funds have mobilised a net Rs 24.2 billion so far in 2008/09, almost 41 per cent lower than the year ago period.

"Fixed deposits and assured return insurance plans are becoming relatively more popular, compared to tax funds," said Kartik Varma, co-founder of iTrust Financial Advisors.

"Investors are now running risk averse towards anything to do with the equity markets." Two of the four new tax funds launched in the current quarter for which data is available have received lacklustre response -- JP Morgan India Tax Advantage Fund and Bharti AXA Tax Advantage.

This is in sharp contrast to 2008, when five new tax-saving schemes collectively garnered over Rs 7.5 billion in the March quarter.