The budget may have plugged it but dividend stripping could be on its way back -- with a bang and with a difference. First and foremost -- it is not fictitious as the erstwhile equity dividend stripping. It's not as hefty and speculative. And it comes with a cost. The dividend stripping opportunity it presents will find takers among many big investors to help reduce their capital gains tax liability.
11-Sep-2001 •Research Desk
The budget may have plugged it but dividend stripping is back with a bang. And, with a difference! This time, debt funds would facilitate dividend stripping after registering whopping gains in the longest bull-run on bond markets. Key distributors and fund players confided to the Fund Spy that Pioneer ITI Income Builder Account (IBA) is planning to give a lavish 15 per cent in its half-yearly option. The record date for the same is likely to be September 28. The option's latest net asset value is at Rs 14.96, which implies a dividend yield of a little over 10 per cent. Pioneer ITI AMC refused to comment on the issue.
Unlike equity funds, where dividend is absolutely tax-free, income distribution in Pioneer ITI IBA will attract a dividend tax of 11 per cent. So investors will not have an opportunity to book a substantial (notional) capital loss as in the case of a hefty dividend from an equity fund. Moreover, dividend strippers will have to stay put for a period of 3 months in the fund to avail the tax credit. However, it should hardly be a matter of concern since bond funds are not as volatile as equities. Hence, the possibility of any real capital loss is unlikely. The budget for 2001 had stated that investors in a fund, which declares dividend, should either enter the fund three-months prior to the record date or stay put for three months after the record date.
On the other hand, the mutual fund will gain from the growth in the asset base for at least three months and earn a healthy management fee. Earlier, speculators parked their investments only for a day in equity funds for the purpose of dividend stripping and this meant virtually nothing in terms of management earnings. The AMC will also benefit by levying an exit load though a bulk of the load charged is paid back as selling commission. Pioneer ITI Income Builder has an exit load of 0.6% for redemption after 90 days.
With Pioneer ITI showing the way, other fund houses may follow suit since all bond funds have recorded handsome gains in the last few months. Such earnings will give a much-needed boost to the bottomline, with most fund houses facing a tough time as sales in equity funds have taken a plunge.