MIP or FDs

[life2007]

Hello Friends!

I had raised my below query earlier too, got good answers, but never understood or implemented fully.

I have been investing in MFs since 2008 on regular basis and continuing to do so periodically and small SIPs. While the aim for this is capital growth, I have also invested some amount in FDs and PPF.

As I do not have regular job, my incomes highly fluctuates like our stock market

So I am thinking of putting a good decent amount to begin with (2 lacs) in a place I get regular income to meet some of my monthly expenses. My immediate thought was monthly postal scheme but I thought since age is on my side (35), I thought I better invest in a area where there is some risk. So MIP is what is going in my mind.

However, I am just not able to understand the tax part of it, indexation, or STCG or LTCG. If somebody could explain this with an example, it would be highly appreciated. Let us say I put 2 lacs in FD and MIP, which would be advisable. I might come under 10% tax bracket please.

Also, I plan to raise this from 2 lacs to 5 lacs over a period of time. Should I invest 2 lacs at one go, would prefer this because if this amount is lying idle in savings account, expenses naturally mount up. I would not withdraw this until next year, so I believe there will be less tax. Also, since I will be going for Divident option, do I need to consider this income in my tax slab? Looks simple, but for a layman, it is all confusing, distribution tax, indextion tax, long term tax, short term tax, what not.. if some body could help pls..

Thank you

Regards

Jeet
Regards

 

[yodlee99]

Basics: If you sell mutual funds or stocks within 365 days of purchase, the profit that you make comes under Short term capital gains tax. If you hold it for more than more than 365 days in your possession, the profits from sale are subjected to Long term capital gains tax.
Further more, the funds are classified as equity funds (that invest largely in the stock market) and debt funds (that invests largely in govt bonds).

Long term capital gains on sale of equity oriented funds - NIL
Long term capital gains on sale of funds other than equity oriented funds - 20% with indexation or 10% without indexation (whichever is lower) + 10% surcharge + 3% cess
Short term capital gains on sale of equity oriented funds - 15% + 10% surcharge + 3% cess
Short term capital gains on sale of funds other than equity oriented funds -30% + 10% surcharge + 3% cess

As you can notice, equity funds held over 1 year invite NO tax. This is done to encourage people getting into stock market and stay invested for > 1year.
Regarding indexation, the mutual fund house calculates which ever is lower among the 2 options and takes care of it.
Between growth and dividend options, we suggest people to go with growth option for 2 reasons - money compounding as well as to avoid paying dividend distribution tax of 12.5% (approximately).
Hope this helps!

 

[vishal412]

Stock Markets are rising and, in these rising markets diversified equity Funds are among the most preferred investments for investors, and hybrids funds which includes balanced funds and MIPs are relegated to the sidelines.
That is most unfortunate, because investors are missing out on a very critical cog in their portfolio by shutting out hybrid funds completely. Hybrid funds can add immense value to the investor's portfolio . While the role of balanced funds in the investor's portfolio has been well-documented, it's time for investors to recognize the value MIPs can add to his portfolio.

 

[life2007]

Hi

Thank you so much for the basics. There is much clarity now.

So investing in equity funds and hold over 1 year is the best option as it has absoultely NO tax right?

But what if we do not want to put everything in one basket and that too on risky avenue like equities?

Is there no better option to generate reasonable monthly income by parking a decent amount (2 lacs at the moment) than very conservative FDs or post office monthly schemes?

I thought MIPs are the right bet as the minimum 10-15% risk exposure will help to beat the inflation and generate reasonable dividends month after month. Does the tax part (all taxes included) eat away a big chunk? I understood your below figures.. but still not getting it correctly, sorry for being so dumb

Are there any other options in this category ?

Thanks

Jeet

Basics: If you sell mutual funds or stocks within 365 days of purchase, the profit that you make comes under Short term capital gains tax. If you hold it for more than more than 365 days in your possession, the profits from sale are subjected to Long term capital gains tax.
Further more, the funds are classified as equity funds (that invest largely in the stock market) and debt funds (that invests largely in govt bonds).

Long term capital gains on sale of equity oriented funds - NIL
Long term capital gains on sale of funds other than equity oriented funds - 20% with indexation or 10% without indexation (whichever is lower) + 10% surcharge + 3% cess
Short term capital gains on sale of equity oriented funds - 15% + 10% surcharge + 3% cess
Short term capital gains on sale of funds other than equity oriented funds -30% + 10% surcharge + 3% cess

As you can notice, equity funds held over 1 year invite NO tax. This is done to encourage people getting into stock market and stay invested for > 1year.
Regarding indexation, the mutual fund house calculates which ever is lower among the 2 options and takes care of it.
Between growth and dividend options, we suggest people to go with growth option for 2 reasons - money compounding as well as to avoid paying dividend distribution tax of 12.5% (approximately).
Hope this helps!

 

[surfingminds]

I am also in the same fix ,
I looking for Fix income plans to add some stable future income and protection to my portfolio. I also have similar amount of allocation to be done in 2011 i.e invest 5 lakh to get regular income i have choosen following instruments
1. Icici dynamic or Sunaram divident yeild : 1 lakh
2. HDFC Prudence : 1 lakh
3. Reliance MIP : 1 lakh
4. Hdfc MIP : 1 lakh .... I might only move to one MIP at the end

i.e have one equity diversified divident paying option, MIP and solid balance fund.


I am not sure if this will work fine but i feel in next 5 years time my investments should atleast give me 60 K per year regular income apart from the capital appreciation.

also in the process my debt component is growing ..

 

[life2007]

Ok Surfingminds!

Good to know that I am not alone in fix

Your below idea looks fine to me, you will be going for dividend for all the below funds right?

Also, have you considered tax implications.. if yes, can you explain.. how and what exactly you will shell out as only TAX against the below 5 lacs investment?

Normally for equity diversified funds growth option, the logic was simple.. invest and stay put for atleast one year.. and forget about Tax.. but these debt funds or MIPs also with dividend payout seems messy and confusing to me.. though the basics are much clear thanks to yodlee99.

Other experts who already have experience, please share these vital knowledge to persons like us who wants to have peace of mind as well have some regular amount taking some risk...

Thanks

Jeet

I am also in the same fix ,
I looking for Fix income plans to add some stable future income and protection to my portfolio. I also have similar amount of allocation to be done in 2011 i.e invest 5 lakh to get regular income i have choosen following instruments
1. Icici dynamic or Sunaram divident yeild : 1 lakh
2. HDFC Prudence : 1 lakh
3. Reliance MIP : 1 lakh
4. Hdfc MIP : 1 lakh .... I might only move to one MIP at the end

i.e have one equity diversified divident paying option, MIP and solid balance fund.


I am not sure if this will work fine but i feel in next 5 years time my investments should atleast give me 60 K per year regular income apart from the capital appreciation.

also in the process my debt component is growing ..

 

[yodlee99]

I understand your predicament. If you are new into investments, you are not alone. You may or maynot like this, but invest partly in FDs with nationalized bank and post office savings. Park the rest in well-managed equity diversified funds that are really safe like HDFC Prudence or Reliance regular savings balanced fund. Check the returns after few years and you will come to the conclusion that in the long run, equity scores much better than any FD.
For emergency needs, go with liquid funds like HDFC Hi Interest short term plan or Reliance Medium term plan.
I have read Robert Kiyosaki's books and know that where there is opportunity, there is no guarantee and where there is a guarantee, there is no opportunity.

Good luck!

Hi

Thank you so much for the basics. There is much clarity now.

So investing in equity funds and hold over 1 year is the best option as it has absoultely NO tax right?

But what if we do not want to put everything in one basket and that too on risky avenue like equities?

Is there no better option to generate reasonable monthly income by parking a decent amount (2 lacs at the moment) than very conservative FDs or post office monthly schemes?

I thought MIPs are the right bet as the minimum 10-15% risk exposure will help to beat the inflation and generate reasonable dividends month after month. Does the tax part (all taxes included) eat away a big chunk? I understood your below figures.. but still not getting it correctly, sorry for being so dumb

Are there any other options in this category ?

Thanks

Jeet

 

[life2007]

Thank you so much yodlee99.

You have explained to the core. Along with this let me take the liberty to ask you another query related to your below comments.

From the year 2008, I have been investing in equity diversified funds both in SIP and lumpsum in whatever capacity I can and continue to do so.

After reading so many articles, i heard the term profit booking and somewhere in between 2009, I paritially withdrew some amount. Then I realized, that I dont require the money, it stayed idle for couple of months in savings acct before I pumped back again to the MFs. Ofcourse, some extra expenses occurred. Then I told myself , not to redeem for the next 10 years unless ofcourse in emergency need. Now what I am again hearing, always book profits periodically and adjust debt-equity ratio and what not.. I mean given my age 35, I got to know I should be having a balance of 60% equity and 40% debt. Whenever this balances tilts, I should pump back the surplus money earned in equity to maintain this ratio. So far so good..However, I just dont know how to put this in practice. What am i supposed to calculate and how. Should I include PPF, FDs as debt and MFs as equities?. Only from 2008 i could start savings.. So right now focus is only in this three...PPF, FDs and MFs. Can I just not forget about this balance of portfolio and randomly invest in all this three of my own without bothering about the real returns or stuff like that.. I am very poor in analysis and stuff like this. Just want capital growth over long run and am fully conscious about the portion of risk I am taking in MFs. Otherthan that, I also look at the performance of the Funds I have invested periodically and change over too. For example, I bought a bad fund JM contra initially, but realized it is not growing, redeemped at loss and transferred to good perfoming fund.

All this is not enough? If not, could you suggest a simplified layman method please. All this returns, CAGR and stuff like this scares me... I am very simple guy.. who understands simple maths.. For eg: Invested 1000 in 2008 now it is 1400 that is it.. 400 rs profit.. my brain is so dumb to think beyond this.

Thank you

Regards

Jeet

I understand your predicament. If you are new into investments, you are not alone. You may or maynot like this, but invest partly in FDs with nationalized bank and post office savings. Park the rest in well-managed equity diversified funds that are really safe like HDFC Prudence or Reliance regular savings balanced fund. Check the returns after few years and you will come to the conclusion that in the long run, equity scores much better than any FD.
For emergency needs, go with liquid funds like HDFC Hi Interest short term plan or Reliance Medium term plan.
I have read Robert Kiyosaki's books and know that where there is opportunity, there is no guarantee and where there is a guarantee, there is no opportunity.

Good luck!

 

[yodlee99]

For eg: Invested 1000 in 2008 now it is 1400 that is it.. 400 rs profit..

This is all that one needs to know. Beyond that, everything else is not necessary. This is exactly the point that SEBI is trying to drill into the brains of big shots who manage these funds. Their job is to make a complicated stuff into something simple for a layman to understand.
Tell me this, did you start walking in 1 day? No right... neither did I. When I was new in driving cars, I would not see anything but the road in front and the rear view mirror. Nowadays, there is a cell phone in 1 hand and a coffee cup in the other. Needless to say, changing radio stations can be done with an elbow..
Start investing in a few trust-worthy funds that I have suggested earlier... I won't change it. Its ok to book profits and reenter. A few conservative investors invest initially only in FDs and postal savings (for capital protection) and invest the returns in midcap stocks for better returns. Remember, FDs return zero or even negative returns after adjusting for inflation. Everyone needs to own some equity.
Another thing with equity is that you might see the downward slide once in a while. You may get into a tendency to sell... do the opposite... buy more and hold your stocks. In order to protect against such downward trends, increase your SIP investments in these funds every year.

 

[surfingminds]

Hmm its really nice to know life2007 a lot seem to be common even i invested in JM Contra a very bad inveestment yet to sell and redeploy the money...

Interesting thing is I started with Equity, moved to equity diversified and now i am using balanced funds and regular income and fds for future... so following is what i can share m doing right now

I like HDFC and Reliance as fund house and few others

1. STP into HDFC Prudence + Reliance Growth I regularly invest into this funds more than 10k every correction of market here its STP cuz i am not doing any SIP also i plan to deploy some money in liquid funds and do regular transsfer

2. Icici dynamic for future divident yeild m invested using STP

3. Post office Savings scheme : this is i am looking now to have a regular income of 3000 after 4.5 lakh is deployed this regular returns will be invested back in equity diversified funds

4. Reliance MIP : i am invested into it slowly increasing the amount to get monthly income of atleast 3000 per month so might need 3-4 lakh of investment

5. SIP in Reliance REgular savings Equity this will be regular 5-10 k per month for 10 years or more ..

and this is my future strategy apart from what i hold which i churn regularly,,

Also I am invested directly into equity.. good companies regular basis