Till last year, the dividends earned from mutual fund investments were not taxable and hence neither the investors nor the MF houses were required to pay any tax on the dividends. As a result of this tax-free structure, the MF houses and banks were able to attract many investors to invest in equity mutual funds. Like the fixed return plans, the balanced mutual funds giving dividends were sold in the market with ease.
End of a tax-free era:- Since the last budget, as introduced by the Central Government, tax is being levied on the long term capital gain from the MF investments (10% on the sum exceeding Rs.1 lakhs) and on the dividends at the rate of 10% to be deducted at source. In a way, it is good, as the investors will start considering the MF investments on a long-term basis.
At the same time there are investors who require monthly returns from mutual funds and let us see how the preferred MF investors are able to fulfil their requirements of getting monthly dividends from MF.
There are basically two types of investors who seek monthly returns on their investments. One would not like to take a risk while investing and the other one would be prepared to take risk while investing under this category. Let us see the options for those who don’t want to take risk.
Debt mutual funds are the best option for those who are not prepared to take a risk in their investments. Still, if they do not want to take any kind of risk whatsoever, the best-suited option is ‘liquid funds’. If a little additional return is expected, they can look at the money market or low duration funds. In this scheme, they can invest their whole amount and by means of ‘Systematic Withdrawal Plan’, they can periodically withdraw a fixed amount every month. In the present trend, they can take 7% of annual return amounting to Rs.583/- for every lac of investment every month. For those who would like to take more risk by investing on low duration funds, they will be able to get little more appreciation in the principal amount over a period of some years.
It is to be remembered that under a systematic withdrawal plan, one is required to sell the units in order to get the return. However, the value of the funds will remain the same for a long time. Under the mutual fund investments, there is no involvement of tax deducted at source (TDS) and hence it will be beneficial for those who are not under tax bracket.
If any tax is payable, it is required that the investors need to pay up within the stipulated time or at the time of filing the tax return. Another advantage is that those who invest in MF and expect the monthly return only after the first three years, they are required to pay tax only on the long-term capital gain which will be less than the tax on Fixed Deposits.
Debt based mutual fund plans suitable for investment.
TATA LIQUID FUND
Tata Liquid Fund handles more than Rs.14,000 crores worth funds. There is no exit fee in this fund. One can enter and exit anytime. The expenditure ratio of this fund is 0.15% and the yield on maturity is 7.62%. The average maturity time of bonds invested by this fund is 55 days and hence the mark-to-market concept is not applicable to this. This fund possesses only quality-rich investments.
L & T Money Market Fund:-
This fund manages Rs872/- crores worth of investments. The yield maturity value is 8.20% and the average maturity time of investments by this fund is 106 days. Those who expect little more earnings than the liquid fund, can invest in this fund. The investments it handles are more than 89% quality rich ones of A1+ investments. The expenditure ratio is 0.69% and there is no exit load in this.
Franklin India Low Duration Fund:-
This particular fund is a little more risky than the earlier ones. People expecting more returns can definitely try this one. The yield maturity is 9.49% and the average maturity period of its investments is 13 months. Those who can afford to keep investments for more than three years can look at this fund. This fund currently handles more than Rs5,900/- crores worth investments. Portfolio-wise, this fund is of medium rating only.
Opportunities for the investors who can take risk:-
These investors may not require back the capital amount invested for a long tenure and their expectation of returns will be considerably high. Based on the willingness and capacity of taking the risk, they can choose and invest in either ‘Balanced Advantage’ or ‘Dynamic Equity’, ‘Hybrid Equity’, ‘Large Cap’ or ‘Large + Mid cap’ or ‘Multicap’. They have to allow it to grow for 12 months and from the 13th month onwards, they can take back a particular amount by means of the systematic withdrawal plan.
Approximately, 8% - 9% return can be calculated for every lakh of investment for every year and a sum of Rs.667/- - Rs.750/- can be withdrawn every month. It is possible that since this is a long term investment, one can get 1%-4% additional return . As already stated, this is subject to long term capital gain tax of 10% for the money withdrawn after a year . However, there is no tax on the first one lakh every year. A schedule is given below wherein one can invest in this type of fund based on the risk that can be taken:-
ICICI Pru Balanced Advantage Fund:-
ICICI Pru currently holds 60% their investments in bonds and the balance in equity. The objective of this fund is not to give super normal returns but steady and stable returns under less risk. Those who prefer returns from equity with less risk can opt this fund.
Principal Hybrid Equity Fund:-
Earlier, this fund was known as Balanced Fund. Now it has invested 66% of its investment in equity and the remaining percentage in bonds. This is one of the well-performing fund houses handling more than Rs.1,400/- crores worth. HDFC Banks, Infosys,SBI, ITC etc. are some of the top holdings.
Axis Blue Chip Fund:-
This is a full-fledged large cap fund, managing around Rs.2,200/- crores worth of investments. With HDFC bank, Kotak Mahindra Bank,HDFC Ltd., TCS etc. as their top holdings, it is one of the well-performing fund . Presently, it holds 84% of investments in equity and the remaining in bonds.
Invesco India Growth Opportunities Fund:-
This is a large and mid cap fund. It is working extremely well under this category. It handles more than Rs.650/- crores worth of investments. The average market value of the stocks in this fund is around Rs.75,000/- crores. Its portfolio carries 66% in large cap equity and the remaining amount in mid cap equity.
UTI Equity Fund:-
This is a multi cap fund, handling around Rs.8,000/- crores of investments. The average market value of the stocks in this fund is Rs.58,000/- crores. This is one of the well-performing funds.
The above analysis is self-explanatory and provides in-depth details of each fund under different categories. Investors can pick and choose the best ones as per their risk-taking capacity and aim to get steady monthly returns from their mutual fund investments.
(This article written in Tamil by Chokkalingam Palaniappan, Director, Prakala Wealth Management for Naanayam Vikatan magazine dt 12/8/18 has been reproduced in English by P.S.Ramamurthy)