BSE Building new
BSE Building newReuters file

A consistent decline in stock markets over a six-month period tends to trigger a fall in systematic investment plans (SIPs), says a senior mutual fund industry executive.

"The monthly inflows from SIPs is about Rs 2,500 crore and this could take a hit given the current trend and the momentum could begin in February-March this year," Vikas Sachdeva, CEO, Edelweiss AMC told International Business Times India. 

The S&P BSE Sensex has corrected by about 15 percent since Aug.4, 2015 when it was at 28,000 levels, to 23,709 on Feb.19, 2016. The prevailing external environment and poor third quarter corporate earnings indicate that bearish sentiments are likely to persist in the short-term.

On dividend-stripping, Sachdeva said the government should look at notifying equity MFs under sections 54EC of the Income Tax Act in Budget 2016 to "curb the menace".

Dividend stripping refers to investors buying a dividend plan of a mutual fund and selling the units shortly after receiving the dividend, at a loss so as to claim short-term capital loss and set it off against capital gains. Since dividend is tax-free at the hands of the recipient, an investor benefits both ways.

Section 54EC enables individuals to claim exemption arising out of long-term capital gains from sale of assets held for more than 36 months by investing in notified bonds. 

The two entities that have been notified by the Central government as being eligible for issuing such bonds are National Highway Authority of India (NHAI) and Rural Electrification Corporation (REC). The money is locked-in for three years and the rate of interest on these bonds are slightly lower than comparable instruments with similar maturity.

The MF industry comprising about 44 players had assets under management (AUMs) worth Rs 12.73 lakh crore as on Jan. 31, 2016. While equity funds account for about Rs 3.45 lakh crore, income funds constitute the largest component at Rs 5.71 lakh crore.

(1 crore=10 million, 10 lakh=1 million)