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Nilanjan Dey

KOLKATA, Dec. 12

FOR investors in mutual funds, it may rain bonus issues in the coming months. Going by feelers sent out by fund houses to the market, a number of players are working out ways to include bonus plans in their income products. And at least one player JM Mutual has proposed to come out with a bonus in its gilts scheme, the record date for which is expected soon.

Bonus proposals are not a new concept in the realm of funds, although these seem to have gained some popularity in the recent past, thanks partly to efforts by such names as JM and Chola. In both cases, a bonus option became an add-on feature.

The next few months could see more action being generated on this front, maintain distribution sources. While no names can be officially identified at this stage, the likely candidates could well include a few leading houses, it is pointed out.

The latest to join the ranks of bonus issuers is IL&FS, which has brought in a bonus plan in its bond fund. Last week, the scheme allowed unit holders to shift their holdings to the plan at NAV on certain designated days.

According to Mr N.K. Sharma, CEO of IL&FS MF, a bonus issue can appeal to investors on two counts. One, it can provide one more alternative to those who may not be keen on the two routine options — dividend and growth. Two, it can act as a tax planning tool with some investors.

"It's not that existing investors alone can go in for the bonus. Others can also come in," he said, adding that a bonus offer should not be seen in isolation but as another vehicle to add value to one's investment strategy.

Mr Dhiren Kumar of Value Research notes that getting tax mileage out of bonus issues is not illegal in any way. "It is one of the ways to set off capital loss against capital gain," he explained.

The conventional wisdom, therefore, goes like this: when original units acquired under an appreciation plan are redeemed after the record date (after availing of the right to bonus), the NAV will come down pro rata by the number of bonus units issued. Consequently, this will attract capital gains tax if there is a surplus on such redemption. If the holding period is more than a year, it will be long-term, and therefore eligible to indexation of the original cost.

If bonus units are later redeemed (at a profit), the entire redemption proceeds will be treated as capital gain, since bonus units are deemed to have no cost. If the holding period is less than a year, there would be a short-term capital gain. And if it is more than a year, then the entire proceeds (at ex-bonus NAV) will be treated as long term capital gain, and no indexation benefit will be available since the cost of bonus units is deemed to be nil.

Fund distributors point out that there have been a good number of bonus issues in the past. According to one estimate, there have been around 30 such instances both in the public sector (for example, UTI) and the private sector (example: erstwhile Pioneer ITI). Distributors have also noted that in certain recent launches, the schemes concerned have been launched with bonus options bundled with the regular growth and dividend options.

In fact, at least one fund (Canbank Mutual) actually manages a scheme that carries a `bonus' tag. Canbonus, which was launched in mid-1991, had bonus declarations in 1994 and 1996 in the ratios of 1:5 and 1:4 respectively.

However, as Mr N.R. Ramanujam, MD of Canbank MF, told Business Line, there were no plans to come out with bonus issues at the moment. Canbonus, incidentally, is mainly invested in equity and equity-related instruments. It has a small exposure to debt as well. "A bonus plan adds to an investor's choices," agrees Mr M. Sivakumar, CEO of Chola MF. The fund has recently worked out such a plan in Chola Triple Ace, its Crisil-rated income scheme. It is not willing to state for sure the kind of inflows it had recorded at that time.

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