You gotta hand it to Manoj Nagpal ( @nagpalmanoj ). (He’s a great guy with excellent insights on mutual funds!) In a conversation on the impact of converting arbitrage funds to debt funds , potentially in the budget, he spoke of the strange happenings at JM Mutual Fund’s Arbitrage scheme. The Massive JM Fund Inflow JM Arb Fund was one of the big recipients of investor money, which according to Manoj came in even before the budget (which was on July 10 or so). This money amounted to Rs. 5,500 cr. (approx). The entire idea was to do bonus stripping . That is: Fund would announce a bonus three months later (in Oct/Nov) Investors would get X units at 0 while continuing to own existing Y units at whatever cost they bought at With the bonus, NAV would fall to a much smaller amount (for a 1:1 bonus, or 100% bonus, price would fall to half) Investors could sell their original Y units at a short term capital loss. … (Read On…)
[via Capital Mind]
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