In
its best practice circular issued to AMCs, AMFI has asked fund houses to
discontinue bonus options.
A few fund houses have introduced bonus options, particularly in arbitrage funds and balanced funds which enable corporates to do bonus stripping for tax planning. Bonus stripping arises on sale or purchase of units of equity mutual funds after/before certain period. It helps in setting off capital loss against capital gain in other capital assets.
For instance, if an investor buys MF units under bonus option 91 days prior to record date of bonus and sells the original units subsequently after record date, he/she can set off this losses against any capital gain. Also, the same holds true if investor sells original units after nine months of record date. However, corporates don’t prefer the latter option due to its long holding period. The accumulated bonus units treated as tax free after a year since the arbitrage funds are treated like equity funds for tax treatment. In addition, SEBI rules says that bonus units should not be subject to exit load.
A few fund houses have introduced bonus options, particularly in arbitrage funds and balanced funds which enable corporates to do bonus stripping for tax planning. Bonus stripping arises on sale or purchase of units of equity mutual funds after/before certain period. It helps in setting off capital loss against capital gain in other capital assets.
For instance, if an investor buys MF units under bonus option 91 days prior to record date of bonus and sells the original units subsequently after record date, he/she can set off this losses against any capital gain. Also, the same holds true if investor sells original units after nine months of record date. However, corporates don’t prefer the latter option due to its long holding period. The accumulated bonus units treated as tax free after a year since the arbitrage funds are treated like equity funds for tax treatment. In addition, SEBI rules says that bonus units should not be subject to exit load.
Simply
put, in a bonus issue, the investor does not pay anything. The fund allots new
units for free. Thus, in a 1:1 bonus issue, the investor is allotted 1 new unit
(free) for each unit already held by the investor. Since the net assets of the
scheme remains the same – only the number of unit increases - the NAV will get
reduced proportionately.
Earlier,
AMFI had shot off a letter to AMC CEOs asking them to avoid the practice of
intimating distributors and investors in advance about dividend and bonus
announcements. The industry body had emphasized that the rule should be
followed in true spirit.
Its indeed a great move in the interest of investors, there was amid confusion among general clients and moreover very few AMCs were offering the same. Though it was plain & simple to understand but quite often few distributors don't tell clients or prospects in that much detail; as per an internal survey done among our clients or prospects.
