COLOMBO May 9 (Reuters) - Sri Lankan shares edged up on Monday and hit their highest close in about four months, led by beverage and diversified stocks amid foreign investors' buying.

However, the gains were capped as investors were worried that the island government's move to increase the value added tax (VAT) and impose new taxes effective from May 2 would hit the bottom lines of companies.


The benchmark stock index rose 0.04 percent to 6,594.80, its highest closing level since Jan. 11, and the third session of gains.

The index gained 1.2 percent last week, its fifth straight weekly rise. The 14-day relative strength index ended at 78.277 on Monday, compared with Friday's 78.147, Thomson Reuters data showed. A level of 70 and above indicates the market is overbought.

"Market saw some volatility today as the index is in overbought region, we will see some profit-taking here and there," said Dimantha Mathew, head of research, First Capital Equities (Pvt) Ltd.

Foreign investors, who have sold equities worth 2.85 billion rupees ($19.59 million) so far this year, were net buyers for the third straight session on Monday. They bought a net 27.7 million rupees worth of shares.


Turnover stood at 595.2 million rupees, well below this year's daily average of around 774.9 million rupees.

Shares of Ceylon Tobacco Company Plc rose 0.84 percent, while conglomerate John Keells Holdings Plc gained 0.64 percent. ($1 = 145.4500 Sri Lankan rupees) (Reporting by Ranga Sirilal; Editing by Subhranshu Sahu)