SWP from MIP-A Powerful Investment Strategy

Sunil Jhaveri — Thu, 04 Feb 2010 12:15:57 +0000

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:

Have regular & assured flow of income
Make these withdrawals tax efficient &
Have a possibility of enhancing the overall portfolio value (over a period of time)

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. :

It will show the original investment value of Rs.10 lacs as on say Jan 2001 or Jan 2008 at the NAVs prevalent on those dates
It will show the values one year hence with tax implications on SWP & on FDs
It will show value as on the current date i.e. January 2010 with total withdrawal from say Jan 2001 to Jan 2010/ Jan 2008 to Jan 2010,etc, with long term/short term capital gains tax on SWP & assuming the same returns in FD, its current value and tax implications on the same
Most of the years & observations , you will notice that on Year on Year basis (inspite of SWP @8.50% p.a./i.e. Rs.7100/- pm) your principal is either higher or marginally lower (2008 year

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

Most of the years even on cumulative basis from say 2001 to 2010 or 2008 to 2010,etc years, the current value of your investments in MIPs (inspite of having SWP @8.50% p.a.)is higher than when the investor had started with. This also with much lower tax implication (assuming that the investor is redeeming from MIP in Jan 2010) than what he would have ended up paying as tax on similar interest rate on FDs
Reliance MIP data is from 2001 as the said scheme’s date of inception was November 2000 & that of ICICI Prudential is from January 2004:

ANALYSIS OF RELIANCE MIP SINCE JAN 2001:

FROM		VALUE	SWP	TOTAL SWP	TAX IMPLICATION ON SWP & REDEMPTION IN JAN 2010
Jan-01		1000000	7100
Jan-02	Y ON Y	1,025,196		85,200	1526
Jan-10	CUMULATIVE	1,142,011		766,800	41161
IF INVESTED IN FD		VALUE	INTEREST
Jan-01		1000000	7100
Jan-02	Y ON Y	1000000		85,200	25560
Jan-10	CUMULATIVE	1000000		766,800	230040

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:

FROM		VALUE	SWP	TOTAL SWP	TAX IMPLICATION ON SWP & REDEMPTION IN JAN 2010	CV WITH TAX IMPLICATIONS & WITHDRWALAS
Jan-08		1000000	7100
Jan-09	Y ON Y	896,969		85,200	0
Jan-10	CUMULATIVE	916,047		170,400	0	1086447
IF INVESTED IN FD		VALUE	INTEREST
Jan-08		1000000	7100
Jan-09	Y ON Y	1000000		85,200	25560
Jan-10	CUMULATIVE	1000000		170,400	51120	1119280

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:

FROM		VALUE	SWP	TOTAL SWP	TAX IMPLICATION ON SWP & REDEMPTION IN JAN 2010
Jan-04		1000000	7100
Jan-05	Y ON Y	965,706		85,200	450
Jan-10	CUMULATIVE	1,215,317		511,200	33762
IF INVESTED IN FD		VALUE	INTEREST
Jan-01		1000000	7100
Jan-02	Y ON Y	1000000		85,200	25560
Jan-10	CUMULATIVE	1000000		511,200	153360

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:

FROM		VALUE	SWP	TOTAL SWP	TAX IMPLICATION ON SWP & REDEMPTION IN JAN 2010
Jan-08		1000000	7100
Jan-09	Y ON Y	1,001,096		85,200	0
Jan-10	CUMULATIVE	1,115,173		170,400	12108
IF INVESTED IN FD		VALUE	INTEREST
Jan-08		1000000	7100
Jan-09	Y ON Y	1000000		85,200	25560
Jan-10	CUMULATIVE	1000000		170,400	51120

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:

Over longer period of time under SWP, there are chances of withdrawing a decent sum of money at a reasonable rate of yield every month without the overall value going negative with lesser tax implication than if you would have earned the same returns in FDs over the same period
Though over shorter periods of time (when equity markets are not doing well); an investor might dip into his principal for some time, good performance in equities at a later date will more than make up for that dip with greater tax efficiency
Hence, the said strategy of SWP (assuming a reasonable yield of between 7-8% p.a.) through well managed MIPs can be an effective way of having a regular cash flow without much downside (if at all there might be upside) over longer period of time with much greater tax efficiency
SWP should be preferred even over monthly or quarterly dividend payouts as dividend payouts attract DDT at 14% for individual & 22% for corporate (v/s only 2-5% tax outflows under SWP). As can be seen from tables above, there is minimal tax outgo if one adopts SWP rather than receiving dividends or interest

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SWP from MIP-A Powerful Investment Strategy