This has come in the wake of a sudden spurt in the demand for bonus options in equity funds.

In its best practice circular issued to AMCs, AMFI has asked fund houses to discontinue bonus options. This has come in the wake of a sudden spurt in the demand for bonus options in equity funds.

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.

Last year, JM Financial MF had introduced a bonus option in its open ended equity fund called JM Arbitrage Advantage Fund in which the fund house had collected over Rs.5,800 crore in less than a week's time. After three months, the fund house had declared bonus of 40 units for every 100 units held. Similarly, JM Financial Balanced Fund and BOI Axa Equity Fund too had seen massive jump their AUM.

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.