Mutual funds pay dividends only from realised gains (or distributable surplus). Funds used to pay dividends from their premium reserves earlier, but SEBI in March 2010, mandated to pay dividends only from the profits made on their portfolio.
Going a bit deeper, there are three components to a NAV of the scheme:
The Face value,
Dividend Equalisation Reserve (DER),
Unit Premium Reserve (UPR).
Now let’s assume that you invest Rs.200/- in an MF scheme and your investment goes up to Rs.220/- Though the money has gone up to Rs.220, this never means that these are your profits and they can be given out as dividend as the fund gives away dividends only from the profits. So, till the time this Rs.20 is booked, it remains part of the UPR. If, the fund decides to give dividends worth Rs.5/- this lets your UPR come down to Rs.15/- and the three components of your NAV will be:
Rs.200 (face value),
Rs.15 (UPR) and
Also, the regular plan can declare a dividend out of past reserves (DER) (this is due to prior existence) even if they have not booked any profit in the recent times.
Basically the dividends of regular plans are higher than that of direct plan. This never indicates a loss for investors in direct plans, as the NAVs of direct plans are always higher and the expense ratio is lesser. Whereas, it’s the vice-versa for regular plan.
In the long run, the difference in the dividends really don’t matter, as these are not really an indicator of fund performance. Due to lower expense ratio, the direct plans will always score over regular plans.
But for the new schemes, both plans will be launched at the same time, with same dividends.