SWP from MIP-A Powerful Investment Strategy

Every year combination of rising inflation, volatile debt & equity markets & lower/ higher interest yields is creating havoc in portfolios of an individual. An investor who wishes to have regular flow of income; be it a retail, HNI, Pensioner or a Senior Citizen is at a loss  as to how to plan their day to day expenditure with a matching or higher yielding investment portfolio. Either they have to keep on reshuffling their asset classes to make their ends meet or take unnecessary risk in their portfolio (with no guarantee of it giving positive returns at the end of the year) to earn that extra bit of money.

Other alternative is parking their funds in Fixed Deposits with some assured returns but a very tax in efficient vehicle (as the investor will have to pay full tax on interest). Also, in FDs, funds get stuck for a period of time like 1/2/3/5 years & hence, the investor loses on liquidity as well. Also, the principal amount at the end of the FD tenor does not appreciate & the investor gets back the same amount which he/she would have invested at the beginning of the period. Also, many times these returns do not even beat the inflation.

In such a scenario, the investor who wishes to earn a regular income is at a tremendous loss in terms of options available to him to earn regular income to meet his day to day expenses. However, one strategy that can help an investor overcome all the above viz:

Is SYSTEMATIC WITHDRWAL PLAN from well managed MONTHLY INCOME PLANs. This tool, besides being an extremely tax efficient way of having regular cash flow for the investor also has a capability of enhancing the overall portfolio value (if managed well & withdrawals of the investor on an ongoing basis is less than the overall returns of the scheme i.e. if the scheme has performed say 12% p.a. in one year & the investor has only done SWP of say 8.50% p.a.; then the investor besides withdrawing regular sums through SWP is also enhancing their overall portfolio value).

Following analysis of two of the best managed MIPs viz. Reliance Monthly Income Plan & ICICI Prudential Monthly Income Plan will show case how SWPs score over traditional FDs in terms of returns & tax efficiencies over a period of time. The way the following table are designed are based on an original investment value of Rs.10 lacs at their respective NAVs & SWP @8.50% p.a. i.e. Rs.7100/- p.m.  :

being an exception as equity markets had collapsed in that year)  from the start & the investor has paid very little tax compared to tax implications on FD interest

ANALYSIS OF RELIANCE MIP SINCE  JAN 2001:

As can be seen from above on Y on Y i.e. from Jan 2001 to Jan 2002 value of your MIP after Rs.85,200/- as SWP is worth Rs.11,42,011 with tax implication of only Rs.1,526 v/s tax implication of Rs. 25,560/-  in FDs . On cumulative basis since Jan 2001 till Jan 2010, an investors has don an SWP of Rs.7,66,800/- having total tax implication of Rs.41,161/- (including Short Term & Long Term & again assuming that the investor is redeeming from MIP at CV of Rs.11,42,011/-) v/s same interest of Rs.7,66,800/- on FD  having an a tax implication of Rs.2,30,040/-.

ANALYSIS OF RELIANCE MIP SINCE JAN 2008: YEAR WHEN EQUITY MARKETS CRASHED:

As can be seen from above on Y on Y i.e. from Jan 2008 to Jan 2009 value of your MIP after Rs.85200/- as SWP is lower at Rs.8,96,969/- with no tax implication (due to loss). However, on cumulative basis from Jan 2008 to Jan 2010, value of your MIP has grown to Rs.9,16,047/- with no tax implication (due to losses). Total value of your investment in MIP plus withdrawal is Rs.10,86,447/- v/s total value of FDs plus interest less tax is marginally higher at Rs.11,19,280/-

ANALYSIS OF ICICI PRU MIP SINCE  JAN 2004:

As can be seen from above on Y on Y i.e. from Jan 2004 to Jan 2005 value of your MIP after Rs.85,200/- as SWP is worth Rs.9,56,706/-  with tax implication of only Rs.450/- v/s tax implication of Rs. 25,560 in FDs . On cumulative basis since Jan 2004 till Jan 2010, an investors has done an SWP of Rs.5,11,200/- having total tax implication of Rs.33,762/- (including Short Term & Long Term & again assuming that the investor is redeeming from MIP at CV of Rs.12,15,317/-) v/s same interest of Rs.5,11,200/- on FD  having a tax implication of Rs.1,53,360/-.

ANALYSIS OF ICICI PRU MIP SINCE JAN 2008: YEAR WHEN EQUITY MARKETS CRASHED:

As can be seen from above on Y on Y i.e. from Jan 2008 to Jan 2009 value of your MIP after Rs.85200/- as SWP is  at Rs.10,01,096/- with no tax implication v/s similar interest on FD of Rs.85,200/- having a tax implication of Rs.25,560/-. However, on cumulative basis from Jan 2008 to Jan 2010, value of your MIP has grown to Rs.11,15,173/- with  tax implication of Rs.12,108/- after SWP of Rs.1,70,400/- v/s same interest of Rs.1,70,400/- on FD having tax implication of Rs.51,120/-

CONCLUSION:

Article in Economic Times Delhi

 

 

 

New Guideline by SEBI for Debt and Money Market Instruments

Please refer to my note on Templeton Floating Rate Fund. I had referred to SEBI’s new guidelines for valuing securities which was in the pipeline and was expected to come into effect from 1st April 2010. SEBI has today come out with a notification to that effect which is going to come into effect from 1st July 2010.

Just wanted to bring this to the notice of all my esteemed investors.

Hence one part of the expectation which was going to impact liquid plus schemes is already in place. Another negative impact will happen if and when DDT on debt schemes is increased from 22% to 28%.

Please click here for the original notification

How Does One Read the Credit Policy Review

Whew, RBI Policy Review is behind us. Though there was an unpleasant surprise of 75 bps CRR hike (against market expectation of 50 bps) & there was knee jerk reaction in the equity markets (corrected by more than 300 points post the announcement before settling down & currently (2:20 PM) only 13 points down on the SENSEX), debt markets showed more restraint. 10 year 6.90%, 2019 went up marginally to 7.73% (pre policy levels of 7.69%), it has settled back at around the same levels. Also, against market expectations of short end of the yield curve going up, there has been only marginal move of 2-3 bps in this segment of the curve. 3 year paper of PFC which was traded at 7.48/50 % levels pre policy has marginally moved upto 7.50/52% & 5 year PFC has moved up marginally from 8.28/30% levels to 8.30/32% levels.

Though short and medium term rates have not moved up today, the same will start inching up closer to dates of CRR hikes in February. Same will be the case when advance tax outflows kick in during March 2010. This is the time when yield curve will start to flatten from its current steepness (when 1-5 year yields will start moving up). Long end of the curve is (as expected) not likely to be impacted so much.

What were the key announcements & Forecasts?:

How does one read into RBI’s move of increasing CRR by 75 bps & not touching the benchmark rates?

What are the milestones post this Policy Review which can affect the debt markets?:

Hence, I see this Policy as a sigh of relief as immediate negative news is behind us (without impacting markets too much). Also this should give some insight into the mind of RBI (wherein they wish to see accelerated growth) & hence may not be in a real hurry to increase rates.

Impact of this liquidity tightness during February (when CRR hike takes effect) & advance tax outflows happen in March 2010, will be reflected in Short Term Plans for a short period of time. This asset class will have some negative impact before bouncing back post March 2010. On the other hand, if fiscal numbers for next year are on the positive side (with an assumption that RBI might not raise rates in hurry to achieve accelerated growth), long end of the curve should start rallying post March 2010. Another factor which can impact the long end positively is that Govt has almost finished their borrowing programme for the current year.

 

 

Follow up note to the NFO of AXIS Short Term Plan

Thank you all for investing & supporting the NFO of AXIS Short Term Plan which closed on January 20’2010. The said NFO collected a decent sum of close to Rs.300 crs. As was discussed with most of our investors, 50% of these funds are already invested in 2-5 year corporate bonds & balance 50% is invested in CPs/CDs & cash.

As per the offer document, of the above, upto 30% of the portfolio will stay invested in less than one year maturities. Also, the Fund Manager has taken a tactical call of investing another 20% (out of the allocation earmarked in CP/CD as the same was giving higher carry than parking under CBLO) of the portfolio in medium term debt of 2-5 year segment post the Credit Policy Review tomorrow. If the RBI hikes benchmark rates, he will be able to capture that higher carry.

Inspite of the fact that only 50% of the portfolio is invested in corporate NCDs of 2-5 years, the said portfolio has captured a very decent yield of 6.29% with average maturity of close to 1.75 years. Post the policy, the Fund Manager hopes to increase the Average Maturity to 2 years with gross yield between 6.50% to 6.75%.

Current attributes:

RETURNS SINCE INCEPTION I.E. FROM JAN 20 TO JAN 27: 6.73% p.a.