Need: One of our investor retired from a plum post from a private organisation with decent retirement corpus of over 1 crore but didn’t have a regular pension. He wanted to invest this corpus in a way that he gets a regular post-tax income of Rs.60,000/- per month. Another investor wanted to invest in lumpsum to provide regular money to his daughter to take care of her education and living expenses who was going to pursue a degree course in engineering in Europe.
Someone would like to provide a regular income to her special child to take care of expenses over lifetime of the child. Another person may wish to provide a regular income to her parents. Common among them all is that they have lumpsum money to invest to get regular cash flow from it with capital remaining safe or appreciating.
Options: Retirees look towards senior citizen saving schemes (SCSS) and Pradhan Mantri Vaya Vandan Yojna (PMVYY) both offering 7.4% interest p.a. with an option to get interest monthly or quarterly. Other options are post office monthly income schemes, RB!’s floating rate savings bonds and immediate annuity plans offered by insurance companies.
Limitation of most of these investments, is that interest now-a-days is reset every quarter or half yearly. Interest or income received from these investments, is fully taxable in the hands of investor depending on his/her tax slab. For a person in the highest tax slab the effective tax rate will be around 4.85% or lesser at current ratesand also one can’t invest more than 30 lakhs cumulatively in the two schemes.
Is there a better alternate: So where can one invest to earn higher returns than these and also get regular income. Yes there is but remember if you wish to earn more than these schemes than definitely you have to assume some risk. For this purpose we analysed two balance advantage fund with over ten year of history with both following different investment style.
Balance advantage funds or BAF are the mutual fund schemes that invest in debt and equity. Typically a BAF can invest as high as 80% and can go as low as 20% into equity. They can invest upto 35% into debt. They also use arbitrage and derivatives to hedge or maintain their equity levels. They are taxed as equity funds - @15% of profits if money withdrawn within a year of investment or @10% of profits earned in excess of 1 lakh on withdrawal made after one year of investment.
To take a leaf out of history we analysed performance of two such funds over a period of ten years. For our example we invested one crore each in the two funds on 3rd January 2011 and started withdrawing 8 lakhs at the end of each year for next ten years upto 31 December 2020. In these ten years 1.6 crore were withdrawn from the investment of 2 crores.
Imagine what would have been the value of the residual investment – 2.86 crores. Amazed! And this was despite stock markets falling down by over 25% in very first year of investment i.e. in 2011. These two funds value was also down by 2.26% and 8.77% in that year. Following chart shows the value of investments at the end of each year after withdrawal of Rs. 8 Lakhs during this period:
Tax Efficiency: Another aspect that an investor has to check, is that of taxation. If this is the only income to the investor still s/he will fall in 20% tax bracket and source of this income would have been SCSS or PMVYY, the investor would have lost 14.5 lakhs in taxes. In case of BAF, because of its equity taxation and option we chose for getting the regular income total tax liability over ten years would have been just Rs. 4.4 lakhs. Savings of over 10 lakhs apart from the capital appreciation of 86 lakhs. Off course this goes without saying that “Mutual Fund investments are subject to market risks.” Following is the comparison of these three options:
|
Parameters |
Senior
Citizen Saving Scheme |
Pradhan
Mantri Vaya Vandan Yojna |
Immediate
Annuity Plans |
Balance Advantage Fund |
|
Safety /
Risk |
Very
High |
Very
High |
High |
Moderate |
|
Return
Prospect |
Fixed |
Fixed |
Fixed |
High |
|
Taxation of Interest/ Profit Earned |
As per
tax slab |
As per
tax slab |
As per
tax slab |
@15% of short term profits & @10% of long term profits earned in excess of one Lakh |
|
Liquidity |
Conditional |
Conditional |
Low |
Very
High |
|
Investment
Limit |
Upto 15
Lakhs |
Upto 15
Lakhs |
No
Limits |
No
Limits |
In brief we find this to be a better investment option for getting most tax efficient regular income and capital appreciation, especially for those who are in higher income tax bracket by taking moderate risk as the fund manager adjusts its equity exposure very fast according to developing equity market outlook. So any investor with investment period of 5 years or more must take a dip into this.
Please consult your financial advisor to explore BAF and see if it fits into your portfolio. You may also post your queries to us for any information you want or wish to make investment. You may whatsapp to 9254673750 or 9958447700. You may also send an email to info@investmentmitra.com Please do mention your name, contact details and location in your communication.
Happy Investing!
Team InvestmentMitra
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