The Hindu Business Line : MFs brace for dividend stripping

MUTUAL funds are expected to turn net sellers over the next few days to cope with dividend stripping by investors. The 90-day lock-in period for funds that declared dividends in December is expiring and investors' might start booking capital losses.

Dividend stripping is the practice of cashing in on the dividend as soon as it is declared and exiting the fund after the mandatory ninety-day period. The difference in the net asset value between entering and exiting the fund is booked as a capital loss. "We could be selling depending on the level of redemptions in the fund," said Mr Rajat Jain, Chief Investment Officer, Principal Asset Management Company Ltd. Principal Growth Fund had declared a dividend of 35 per cent on December 26, 2003.

Due to the prevailing market conditions, mutual funds had declared generous dividends in December. For example, IL&FS Index Fund — BSE and NSE — declared 45 per cent dividend each, Reliance Growth Fund 60 per cent, Reliance Vision 45 per cent, HDFC Prudence 30 per cent, etc. Mutual funds have registered gross sales of Rs 221.9 crore on Monday.

Fund managers predict that this would go up to Rs 300 crore on an average for the next 10 days. "The numbers in terms of mutual funds sales going around are currently very wild and there have been some big sellers in the market," confirms Mr Shashi Krishnan, Chief Investment Officer, Cholamandalam Asset Management Company.

Despite the negative outlook, fund managers are bullish about the market. "If you go forward a year and analyse this period you would realise that these are good buying days. In the short term however, this could look foolish," said Mr Jain.

"The dividend stripping information is restricted to the realm of the "informed investor". The more important point to be viewed is that liquidity is severely restricted this week. By the time some funds face high selling pressure, the public offer refunds would have got pumped back in to the system. So the effect would be minimal," according to Mr Ashim Syal, Chief Investment Officer, ING Vysya Asset Management Company. "The current slump in the market can be attributed to the fatigue factor. Given that prices have held up for so long, there is bound to be some selling and correction. Market is topping at lower and lower levels," said Mr Krishnan.

The consensus amongst fund managers and brokers is that funds would face selling pressure. However, the effect of this on the market could be minimal to moderate depending on other factors like liquidity, foreign investor activity etc. The investor can merely "wait and watch", they say.