Dividend stripping in mutual funds is in news today.
- Generally dividend stripping involves purchasing mutual fund units which will likely to declare a dividend shortly.
- After receiving a tax free dividend,investor will sell the mutual fund units whose NAV have fallen post dividend.
- It will result in short term capital loss which will be available to set off against short term capital gains.
- Dividend received is also tax free.
Why dividend striping in Mutual funds is difficult task in India:
Taking advantage of dividend stripping in Equity mutual fund is difficult in India.
In 2004, Govt closes all loop holes and make it difficult for investors to take advantage of dividend stripping.
Investor is NOT able to take advantage of dividend stripping in mutual funds if:
- investor buy mutual fund units within period of 3 months prior to dividend record date
- Sell units within 09 months after dividend is declared.
- In such case,capital loss up to extend of dividend income can not be set off against other capital gains.
Dividend stripping benefit is subject to market risk:
Its likely that any investor will not take a significant risk just for benefit of dividend stripping.One just can’t run away from market risk.Such practice was also used for bonus options in mutual funds which have closed now.
