The six debt funds proposed to be wound up by Franklin Templeton Mutual Fund have collected Rs 475 crore in the fortnight ended February 26, 2021, more than double of the Rs 183 crore collected in the previous fortnight.
The NAVs of all the six schemes were higher as on February 26, 2021 vis-Ã -vis their respective NAVs on April 23, 2020, the date on which the winding up decision was taken.
The 6 schemes have received total cash flows of Rs 15,048 crore till February 26, 2021 from maturities, coupons and prepayments.
Cash available for distribution in the five cash positive schemes stands at Rs 1,180 crore as on February 26, 2021. The combined AUM of 6 schemes is Rs 17,466 crore.
While the five cash positive schemes (Franklin India Low Duration Fund, Franklin India Ultra Short Bond Fund, Franklin India Dynamic Accrual Fund, Franklin India Credit Risk Fund and Franklin India Short Term Income Plan) have distributed cash of Rs 9,122 crore, the balance amount will be distributed in tranches without waiting for liquidation of all securities in the portfolio. Only those investors who required remediation or with incomplete documentation did not get cash.
The only scheme with borrowings (4%) is Franklin India Income Opportunities Fund.
The Supreme Court, in its order dated 12 February 2021, upheld the results of the e-voting under regulation 18(15)(c) held in December 2020 and confirmed the winding up of the six schemes. The apex court also appointed SBI Funds Management as the authorized person under regulation 41 to take next steps on monetization.
In April last year, Franklin shut down subscriptions and redemptions while proposing to wind up the six debt schemes citing Covid-induced illiquidity in credit markets.
The six debt funds proposed to be wound up by Franklin Templeton Mutual Fund have collected Rs 183 crore in the fortnight ended February 15, almost 70% less than Rs 602 crore collected in the January 16 – 29 period. Certain lumpiness has been noticed in the funds collections previously as well because in some periods pre/repayments are significant while in some periods they are quite low.
The six schemes have received total cash flows of Rs 14,573 crore so far from maturities, coupons and prepayments. We are not giving the AUM or cash levels of schemes for the fortnight because payments were started on Monday and the figures provided by Franklin are as on February 15.
The big news this week, however, was about FT making some payments to unitholders. Payment to all investors whose accounts are KYC compliant with all details available has been made by SBI Funds Management Pvt. Ltd. (SBI), Franklin said.
While the five cash positive schemes (Franklin India Low Duration Fund, Franklin India Ultra Short Bond Fund, Franklin India Dynamic Accrual Fund, Franklin India Credit Risk Fund and Franklin India Short Term Income Plan) have distributed cash of Rs 9,122 crore available as of January 15, 2021, the balance amount will be distributed in tranches without waiting for liquidation of all securities in the portfolio. The only scheme with borrowings (sub 5%) is Franklin India Income Opportunities Fund.
“We have initiated discussions with SBI and will keep you informed about progress made on monetization,” Franklin Templeton MF said.
Fortunately, the NAVs of all the six schemes were higher as on February 15, 2021 vis-Ã -vis their respective NAVs on April 23, 2020, the date on which the winding up decision was taken.
The Supreme Court, in its order dated 12 February 2021, upheld the results of the e-voting under regulation 18(15)(c) held in December 2020 and confirmed the winding up of the six schemes. The apex court also appointed SBI Funds Management as the authorized person under regulation 41 to take next steps on monetization.
In April last year, Franklin shut down subscriptions and redemptions while proposing to wind up the six debt schemes citing Covid-induced illiquidity in credit markets.
Fixed deposits offered by banks in India are paying interest rates of around 3% to 5.5% for a year. This is very low when compared to a few years ago when these bank deposits gave investors more than 9%. Do you know that debt mutual funds can provide you with returns of more than 7%? This is one of the reasons why debt mutual funds score over fixed deposits. There are many other benefits to investing in debt mutual funds.
Higher earnings
Debt funds gain when there is an increase in the value of bonds in the fund’s portfolio. This happens when interest rates fall. When interest rates rise, the mutual fund will reinvest the proceeds from maturing bonds at higher rates. This is how debt funds are able to provide good returns to investors in any scenario. If you had invested in a well-performing banking and PSU debt fund for five years, you would have earned around 8% while a five-year deposit would have earned just 6.9%.
Better taxation
The post-tax returns on fixed deposits are very low as the interest from this investment will be taxed as per your tax bracket. For instance, if you invest in a deposit that earns 5.5%, your post tax returns will be 3.8% if you are in the highest tax bracket. This is where debt funds can provide investors with higher returns.
The difference in post-tax returns from debt funds will be much higher as the long-term capital gains tax rate is just 20% plus indexation benefits. You can get the indexation benefit on gains from debt funds that have been held for more than 36 months. The cost of acquisition of your investment will be revised as per inflation and this notionally brings down the taxable capital gains. So, your tax liability is reduced. In comparison, interest earned on bank deposits will be taxed at the investor’s income tax slab bracket.
Liquidity
Unlike bank fixed deposits, there is no penalty for withdrawing your money from open-ended debt funds. You can withdraw money any time you want. For a bank deposit, around 1% of your return will need to be paid as penalty if you exit the deposit prematurely. Exit loads on short- and medium-duration funds will be applicable only if the withdrawal is made within a year of investing. Most debt funds have no exit loads. Debt funds also allow you to regularly withdraw from the funds if you want regular income.
Variety of schemes
Most advisors suggest that clients try to match the debt fund’s duration to the investor’s financial goals, time horizon and risk profile. Since different funds have different durations ranging from overnight funds to long term debt fund with 10 years duration, you can easily choose ones that are right for your goals.
Note that debt funds come with risks. However, you have the flexibility to decide what type of risk you want to take. You can choose shorter term funds if you don’t want to take much risks. For instance, banking and PSU debts are considered to have credit profile that is of a bank deposit. So, you can choose from various funds that are right for your goals.
Portfolio diversification
Most debt funds invest in a diversified portfolio. So, portfolio exposure to a single security that may be downgraded is minimised. Default risks are also reduced. For instance, in the case of the DHFL default, the exposure of open-ended funds to the security from this company was typically below 5%.
Unlike debt funds, bank deposits come with high concentration risks because investors hold large sums of money in one bank and run the risk of losing it all if things go wrong with the bank. There is very little information available to investors in case a bank goes bankrupt. They have very few options for exit or redressal. That’s why open-ended debt funds score higher. Open-ended funds are required to provide regular information to investors on the fund’s portfolio and performance.
So, debt funds are better than fixed deposits. However, you need to select well-managed funds that have performed consistently and make sure that the portfolio is a well-diversified portfolio. If a fund is taking too many concentrated bets or has more credit risk than its peers, you shouldn’t invest in the fund. Reviewing the fund once a year is a good way to stay invested in good funds.
The Supreme Court on Friday passed an order dismissing the objections raised by some unitholders of the six Franklin Templeton mutual fund schemes that are being wound up. The fund-house had announced the winding up decision for the 6 debt funds in Apr. 2020.
The court judgement is important because from Monday i.e. February 15, accumulated distributable cash proceeds of Rs 9,122 crore will be returned to unitholders of 5 out of the 6 schemes. Disbursal to unitholders would be possible only when the court accepted that the six schemes should be wound up. The schemes have been shut for redemptions for about 10 months.
The Court also upheld the results of the e-voting, done in the last week of Dec-2020, to seek approval of the unitholders, for or against the winding up.
“…in view of the aforesaid discussion, we hold that for the purpose of clause (c) to Regulation 18 (15), consent of the unitholders would mean consent by majority of the unitholders who have participated in the poll, and not consent of majority of all the unitholders of the scheme. In view of the findings and reasons stated above, we reject the objections to poll results and hold that the unitholders of the six schemes have given their consent by majority to windup the six schemes,” reads the judgement passed by the Bench of Justices S Abdul Nazeer and Sanjiv Khanna.
The objecting unitholders’ primary grievances were related to allegations of gross mismanagement, failure and dereliction of duty by the asset management company (AMC) and Franklin Templeton Trustee Services Private Limited (trustees); violation of the SEBI Act; Mutual Fund Regulations; SEBI harmonization norms; investment horizon profiles; manipulation of Net Asset Value (NAV); disgorgement of wrongful payments etc. In particular, it is alleged that more than Rs 15,000 crore were withdrawn from the six schemes two weeks prior to the decision for winding up. Objecting unitholders submitted that a finding of fraud, on the part of the trustees and AMC, would entitle them to restitution.
The 15 objecting unitholders are Amruta Garg, Areez Khambatta, Persis Khambatta, Khambatta Family Trust, Sanyam Jain, KAJ Associates, Sarika Mittal, Ultra Walls & Floors, Aakansha Maheshwari, Priya Menghnani, Varnika Menghnani, Sriram Gantasala, Ratnajit Bhattacharjee, Aarti Jain and Kiran Rama, who had filed writ petitions. The six schemes put together as on 3rd December, 2020 had 3,15,600 unitholders.
The six schemes of Franklin Templeton MF mentioned above are Franklin India Low Duration Fund, Franklin India Ultra Short Bond Fund, Franklin India Short Term Income Plan, Franklin India Credit Risk Fund, Franklin India Dynamic Accrual Fund, and Franklin India Income Opportunities Fund.
In what could allay some fears of losses, Franklin Templeton Mutual Fund has disclosed that in 5 out of 6 debt schemes to be wound up the NAV as on January 29, 2021 is higher than the NAV on April 23, 2020, the date on which the winding up decision was taken.
The 5 schemes mentioned above are Franklin India Low Duration Fund, Franklin India Ultra Short Bond Fund, Franklin India Dynamic Accrual Fund, Franklin India Credit Risk Fund and Franklin India Short Term Income Plan.
There have been unsubstantiated reports alleging FT investors in the 6 debt schemes can lose 40-50 per cent. However, the NAV data disclosed by the fund-house shows a different picture altogether.
The decision to voluntarily wind up six schemes has been one of the most difficult decisions for the AMC and its lakhs of investors. Franklin, all the while, has maintained that the decision to wind up those schemes was taken with the sole objective of safeguarding value for investors.
The NAV values have improved in most of the schemes on account of the cash generated in these schemes over the last 9 months.
“For one scheme (Franklin India Income Opportunities Fund), the NAV is only marginally lower, ” said Sanjay Sapre of Franklin Templeton in an investor communique.
Further, the combined AUM of the six schemes has increased from Rs 25,648 crore on April 23, 2020 to Rs 26,414 crore as on January 29, 2021.
Recently, the Supreme Court permitted the distribution of available cash in the schemes and directed that an amount of Rs 9,122 crore (distributable surplus as of January 15, 2021) be distributed to the respective unitholders in proportion to their holdings in the schemes under winding up.
Already, across the six schemes under winding up, an overwhelming majority of unitholders (around 96% by unitholders) voted in favour of the winding up. While some reports have alleged that due processes were not followed for the voting, the Supreme Court has so far not given any order on this issue.
From April 24, 2020 to January 29, 2021, the six schemes under winding up have received Rs 14,391 crore from maturities, pre-payments, and coupons. Some of this cash has been used to repay borrowings.Fiv
Five schemes have turned cash positive and have Rs 9,698 cash available to return to Unitholders.
The inflows received across 6 schemes are nearly 46% higher than anticipated in the maturity profile published on April 23, 2020.
The borrowing level in Franklin India Income Opportunities fund, the only fund with outstanding borrowing, has steadily come down from 37.55% on April 24, 2020 to 5% at the end of January 2021.
It will be pertinent to note that of the Rs 14,391crore received since April 24, 2020, slightly more than half of this amount has been received from securities rated “Aâ€, followed by securities rated “AAâ€. Much of this cash has been generated from securities which were unlisted, or where FT was a majority holder – nearly 28% of the cash is from unlisted securities and nearly 75% of the cash is from securities where the schemes are the sole or majority holders.
Most importantly, this cash has been received without any secondary market sale (active monetization) of securities in the six schemes.
The next Supreme Court hearing in this matter is scheduled for February 9, 2021.
The six debt funds proposed to be wound up by Franklin Templeton MF have collected Rs 602 crore in Jan. 16 to 29 period, almost 10% less than Rs 669 crore collected in the previous fortnight.
Over the latest fortnight (January 16 – 29), these schemes received Rs 350 crore as pre-payments.
The 6 schemes have received total cash flows of Rs 14,391 crore till January 29, 2021 from maturities, coupons and prepayments.
The total number of cash positive schemes stands at five. These schemes have Rs 9,770 crore cash available to return to unitholders, subject to fund running expenses. The balance Rs 4,621 crore has been used to repay borrowings and interest thereon of the six schemes.
Individually, Franklin India Low Duration Fund, Franklin India Ultra Short Bond Fund, Franklin India Dynamic Accrual Fund, Franklin India Credit Risk Fund and Franklin India Short Term Income Plan have 65%, 53%, 41%, 27% and 11% of their respective AUM in cash.
Borrowing levels in Franklin India Income Opportunities Fund continue to come down steadily and currently stands at 5% of AUM (assets under management). The scheme will return monies to investors after paying all the obligations/ liabilities towards borrowings/ expenses/provisions, if any, once the Supreme Court gives the nod. Currently the court is hearing the matter regarding the winding up of schemes.
The total AUM of the 6 schemes stands at Rs 26,412 crore at present.
Already Franklin MF’s winding-up proposal has been approved by an “overwhelming majority of over 96 per cent unit-holders†in the recent e-voting.
The matter is being heard in the Supreme Court now. If the top court allows, lakhs of investors who hold units in 5 of the 6 debt schemes will get some money back which have been stuck for nearly a year.
In April last year, Franklin shut down subscriptions and redemptions while proposing to wind up the six debt schemes citing Covid-induced illiquidity in credit markets.
Franklin Templeton Mutual Fund’s six debt funds have collected Rs 669 crore in the January 1 to 15 period, which is 45% less than Rs 1,213 crore it collected in the previous fortnight of Dec. 16 to 31, 2020. As much as Rs 617 crore was received as pre-payments.
So far, the 6 schemes received total cash flows of Rs 13,789 crore as of January 15, 2021 from maturities, pre-payments and coupon payments. More than half of this amount has been received from securities rated “Aâ€. Much of this cash has been generated from securities which were unlisted, or where FT was a majority holder. The total inflows received across 6 schemes is over 40% higher than anticipated in the maturity profile published in April 2020.
The total cash available for the five cash positive schemes stands at Rs 9,190 crore, subject to fund running expenses. The total cash available with 5 schemes is lower than total cash flows because a portion was used to retire debt that the funds were forced to take in a bid to honour redemptions before April 24, 2020.
All the cash received by the six schemes are without any secondary market sale (active monetization) of the securities. This points to the fact that the securities held in the funds can be monetized at fair value if given appropriate time under normal market conditions.
Individually, Franklin India Low Duration Fund, Franklin India Ultra Short Bond Fund, Franklin India Dynamic Accrual Fund, Franklin India Credit Risk Fund and Franklin India Short Term Income Plan have 63%, 50%, 41%, 26% and 9% of their respective AUM in cash.
Borrowing levels in Franklin India Income Opportunities Fund currently stands at 6% of AUM, which is unchanged from last fortnight.
As you may be aware, some writ petitions were filed in the matter of winding up of six of Franklin fixed income schemes in April 2020. On December 3, 2020, the Hon’ble Supreme Court issued an interim order allowing the Trustee of Franklin Templeton to seek consent of the unitholders for the winding up of the six schemes under Regulation 18(15)(c) of the SEBI (Mutual Funds) Regulations 1996.
The unitholders consent vote took place from December 26 to December 28, 2020 followed by the Unitholders meet via video conference on December 29, 2020.
The result of the e-voting along with the report of the observer appointed by SEBI will be submitted to the Hon’ble Supreme court in a sealed envelope. Further steps will be taken as per the directions of the Hon’ble Supreme Court. The next hearing in this matter is expected to be held in the 3rd week of January 2021.
The government has been cutting the interest rate on many of its small savings schemes including the popular Public Provident Fund (PPF). This is because of the change in the way interest rates are set for small savings schemes. Earlier, interest rates were set for a full year. Now, they are reset every quarter based on changes in the yields of government securities. So, if the rates have been reset on April 1st, the next change in interest rates will come on July 1st.Â
Why are interest rates being cut?Â
The interest rates in the country and the yields of government securities have been falling. The yield on the 10-year benchmark Government security is down to 5.9% from 6.5% a year ago. Given the steep fall in a short time, small saving schemes which are linked to government securities are providing lower returns. PPF and Senior Citizens Savings Scheme (SCSS) are the ones that provide higher returns. While PPF interest rate is 7.1%, the interest rate of SCSS is 7.4%.
Why debt funds
In the past year, debt funds have given better returns than small savings schemes. While the average return from long duration debt funds was 14%, short and medium duration debt funds have provided investors with returns of 9%. Funds such as ultra-short-term funds have provided returns that are better than that of post office savings accounts.
Another important point is that the taxation of debt funds is more beneficial than that of savings schemes. Returns you get from post office deposits are taxed as per your tax bracket. For debt funds that have been held for more than three years, the gains are considered to be long term capital gains (LTCG). They are taxed at 20% with indexation benefit. This benefit allows you to recalculate the purchase price after adjusting it to reflect the effect of inflation. This reduces the overall tax on your capital gains.
Another favourable point for debt funds is that they have higher liquidity when compared to post office savings schemes. They don’t have any lock-in such as those for PPF. You can withdraw from debt funds anytime you want. Some debt funds don’t even have any exit load. So, it will not cost you to withdraw money from debt funds.
Here’s how debt funds compare to some of the post office savings schemes.
Ultra-Short-term funds Vs. post office savings account
Interest for post office savings account is only 4% while Ultra short-term funds have provided investors with returns of more than 5%. These funds invest predominantly in securities that have very short maturities. This includes money market securities and government treasury bills. So, you don’t need to worry about credit risk if you invest in these funds. There are fund houses that allow you to withdraw your money almost instantly from some of the funds. This gives you the convenience of a savings account.Â
Medium to long duration funds Vs. post office time deposits
Medium duration funds are comparable to bank fixed deposits. Investors choose these funds when their intention is to lock in their investments for a fixed tenure of more than a year. These funds provide higher interest than any of the post office time deposits. Most time deposits provide just 5.5% while medium to long duration funds have given 11% in the past year. Medium duration funds even score over time deposits on the taxation part. Interest on deposits is fully taxable. However, if you invest in medium duration funds for more than three years, you can make use of 20% taxation with indexation benefits.
Long term debt funds vs. PPF
Now that the PPF rate is reset every quarter and interest rates are falling, you can choose long duration debt funds to get higher returns. You can benefit from the lower interest rates because when interest rates fall, bond prices will go up helping long duration debt funds to provide higher returns to investors. Long duration debt funds have given 14% in the past year when compared to the PPF interest rate of 7.1%.Â
Risk factor
However, when choosing the debt funds to replace your small savings investments, you need to be mindful of the risk you take. Debt funds invest in debt securities of varying tenures and maturities based on the particular fund’s strategy. So make sure you invest in funds with maximum exposure to AAA rated bonds and government securities. Stick to large AMCs who can take liquidity shocks (like Covid 19 related economic crisis). Always look at the underlying securities and see if the fund has exposure to any questionable corporate bonds. Larger exposure to government securities and treasury bills make the fund safer.
However, debt funds score over post office savings investments on many counts – such as returns, lock-in, cost of withdrawal and taxation.
Fortnightly collections of the 6 debt funds proposed to be wound up by Franklin Templeton MF almost quadrupled to Rs 1213 crore in Dec. 16 to 31 period, from Rs 330 crore in Nov. 28 to Dec. 15 phase.
So far, the 6 schemes received total cash flows of Rs 13,120 crore as of December 31, 2020 from maturities, pre-payments and coupon payments.
Franklin India Short Term Income Plan (FISTIP) is the latest scheme to turn cash positive. The total cash available for the five cash positive schemes stands at Rs 8,527 crore, subject to fund running expenses. The total cash available with 5 schemes is lower than total cash flows because a portion was used to retire debt that the funds were forced to take in a bid to honour redemptions.
Individually, Franklin India Low Duration Fund, Franklin India Ultra Short Bond Fund, Franklin India Dynamic Accrual Fund, Franklin India Credit Risk Fund and Franklin India Short Term Income Plan have 52%, 49%, 41%, 23% and 8% of their respective AUM in cash.
Borrowing levels in Franklin India Income Opportunities Fund continue to come down steadily and currently stands at 6% of its AUM.
Please note that the Hon’ble Supreme Court permitted the Trustee of Franklin Templeton Mutual Fund to seek consent of the unitholders for the winding up of the six schemes under Regulation 18(15)(c) of SEBI (Mutual Funds) Regulations, 1996.
Accordingly, the Trustee conducted the e-voting for the same from 26-28 December 2020 followed by a unitholder meet on 29 December 2020. As directed by the Apex Court, redemptions in these schemes will continue to be suspended till the date of the next hearing scheduled in the third week of January 2021.
As per the directions of the Hon’ble Supreme Court, on December 18, 2020, SEBI appointed T. S. Krishnamurthy, former Chief Election Commissioner of India, as observer for the e-voting taking place on December 26-28,2020 and ‘Unitholders’ meetings’ scheduled on December 29, 2020, for the six schemes under winding up.
Mutual fund schemes have become one of the most prevalent investment avenues. In the last few years, mutual funds have assisted investors in achieving their financial goals.
Besides this, it has also offered better tax-adjusted returns than other traditional vehicles of investments.
However, did you know you can also use mutual funds to get a monthly income? Monthly income is important for retirees who no longer have a regular source of income.
Individuals can invest in mutual funds during their working years and redeem their investments and gains after retirement.
Options for monthly income
We know that different types of mutual funds have different investment objectives. And the investment objectives of debt and debt-oriented funds are income generation and capital protection. It also aims to give returns that beat inflation.
However, it is to be noted that mutual funds are linked to the market and cannot provide a stable monthly return like other traditional savings options.
Systematic Withdrawal Plan (SWP) is a facility that offers mutual fund investors the option to withdraw a specific sum of money over a timeframe. While this option is available for both equity and debt funds, setting up an SWP in debt funds is better, as debt funds are less volatile than equity funds.
Do mutual funds pay a dividend?
If you opt for the dividend option, your mutual fund will pay a dividend. Besides SWP, the dividend option
is also a way to get income from mutual funds. In the case of the dividend option, the fund houses distribute the gains to the investor. However, dividends are not distributed regularly and are under the fund house’s jurisdiction.
Unlike dividends received on direct equity investment, mutual fund houses can also distribute the dividends from the invested capital. After the dividend is announced, the unit price of the dividend plan reduces as per the distributed dividend. Dividends are not tax-free. It is added to the investor’s income and taxed as per its tax slab. The mutual fund house will also deduct a 10% TDS on the dividends amounting to more than Rs. 5,000.
Mutual funds growth vs dividend
You can choose the growth or dividend option when you invest in any fund. The dividend option is now renamed as Pay-out of Income Distribution cum capital withdrawal. In the case of a growth option, the fund manager reinvests the returns generated by the fund. Moreover, the dividend distributed will only be a small portion of the invested capital.
So, if we compare the dividend option and SWP, we will see that SWP is a better option than the dividend option.
This article will look at the best way to get income from mutual funds through SWP.
What is Systematic Withdrawal Plan (SWP)?
By choosing to go with the SWP system, you can effortlessly create a regular income through mutual funds. An SWP is the opposite of the Systematic Investment Plan (SIP). Here, you get to withdraw from your mutual funds in instalments. In simple words, the SWP lets you withdraw a certain amount of money from the mutual fund scheme at regular intervals.
Let’s understand it better with an example. Suppose you wish to withdraw Rs.20,000 on the 1st of every month. Thus, you can do so through SWP. You can also choose varying intervals through this facility, such as monthly, quarterly, half-yearly, and yearly depending on your preference.
In the same manner, the amount you would wish to withdraw can vary according to your need. For instance, some mutual fund houses offer you the option to take out only the gains while keeping the invested money intact in the mutual fund scheme.
Once you have selected the sum and the withdrawal frequency, the fund manager will sell units from the scheme on the pre-decided date. And then, the transaction to transfer the selected amount to your bank will get initiated.
Let’s take another example here. Using the AdvisorKhoj SWP calculator, let’s understand the working of SWP. Imagine you have invested a lump sum amount of Rs. 72,000 in SBI Magnum Income scheme – Regular Plan.
Let’s say you need Rs. 3,000 per month through SWP.
AMC
SBI Mutual Fund
Scheme
SBI Magnum Income Reg Gr
Lumpsum Amount
Rs. 72,000
Lumpsum Amount Investment Date
01-04-2019
Withdrawal Amount
Rs. 3,000
SWP Date
10
Period
Monthly
SWP Start Date
06-04-2020
SWP End Date
06-04-2022
Here’s how the monthly SWP will take place:
Now, throughout the entire period of your investment, there will be 24 monthly instalments. Also, you will get to withdraw Rs. 72,000 in these instalments. At 8.28% of the return rate, the fund will have Rs. 6219 on 10th March 2022 after the invested capital of Rs.72,000 is redeemed.
Here, you must remember that if the scheme NAV is appreciating at such a percentage that is higher than the withdrawal rate, the investment value will also get appreciated.
However, despite the fall in NAVs, you will still get the regular income until the end of the SWP period or until there is money in the investment scheme.
So, we have seen that the SWP amount remains fixed and doesn’t vary as per the market movement.
Benefits of SWP
SWP is the best option available for investors to receive a monthly income.
Flexibility
In such a plan, you get the utmost flexibility to select the frequency, amount and date according to your need. Also, you can even stop the SWP at any given moment. If you want, you can withdraw an extra amount above and over the fixed SWP withdrawals or invest additionally.
Capital Appreciation
If the withdrawal rate of SWP is lower than the fund return, your invested amount will appreciate, and you may be able to withdraw more money.
No Tax Deduction at Source (TDS)
One of the significant benefits of investing in an SWP is that if you are a resident of India, you will not have to pay any TDS on your gains.
Mutual Funds to Invest to Get Monthly Income
Mutual funds with low volatility and are capable of beating inflation are considered the best candidates for monthly income. You can put your money in Conservative Hybrid Funds that invest a minimum of 75% of the amount in debt instruments to create a monthly cash flow. Also, the remaining 25% goes into stocks that add better growth to your portfolio.
Furthermore, you can consider other debt fund categories, like Banking and PSU Debt Funds, corporate bond funds, or short-duration debt funds. These funds have the potential to beat inflation.
If not, you can also go with Equity Savings Funds that put a minimum of 65% of your amount in equity instruments such as derivatives. Derivatives are equity-related securities that take advantage of mispricings in several markets to earn risk-free gains by simultaneously purchasing and selling equities.
How to Select the Fund for Monthly Income?
In the previous paragraph, we have seen that debt and debt-oriented funds are best to set up SWP to get monthly income. Now, we will see some of the factors to consider when choosing the right fund:
Past Performance
When selecting a fund for monthly income, we need to look for funds that are not volatile and don’t take unnecessary risks.
As we are parking lumpsum money in a debt-oriented fund, we need to check the fund’s performance when the market is down. If the fund has consistently performed better than its peers during difficult periods, the fund can be a better option.
Expense Ratio
The expense ratio is referred to as the fee charged by the fund house for managing the fund. It includes fund management fee, marketing fee and commission to distributors. The expense ratio is subtracted from the returns generated by the fund.
While the percentage may seem low, it will considerably impact the total investment portfolio. So, it is better to look for a fund with a low expense ratio.
Exit Load
Exit load is the fee charged when exiting a mutual fund scheme. Depending on the fund, you will have to pay an exit load if you withdraw within a shorter period.
This fee is levied to avert quick exit and instant cash outflow from fund houses. Thus, as an investor, make sure you are going with mutual funds with zero or minimal exit loads.
Maturity Profile
The maturity period of the underlying debt instruments varies from one type of debt fund to another. Every debt funds have a different maturity profile. So, depending on your investment period, you can select the debt fund that matches your horizon.
Tax Implications of SWP
The redemption through an SWP is subject to taxation. If you have debt funds and your holding period is less than 36 months, the capital gains realised will be added to your overall income. Also, it will be taxed as per your income tax slab rate. However, if the holding period goes beyond 36 months, the capital gains will be regarded as long-term and taxed at 20% after the indexation.
Regarding equity funds, if the holding period is less than a year, the capital gains will be taxed at 15%. On the contrary, if the holding period goes beyond a year, it will be long-term capital gains and taxed at 10% without any indexation.
Who should look at getting monthly income or using SWP from mutual funds?
Generally, experts recommend SWP for ultra-conservative investors and retirees who wish to get a fixed sum of money.
Apart from this, freelancers and those with varying income can also withdraw money through SWP to cater to their regular requirements.
Key Takeaways
In the end, here are some key takeaways to keep in mind:
Mutual funds could be useful if you look forward to a regular cash flow to meet basic expenditures.
You can earn income from mutual funds by going with an SWP or dividend option.
SWP is a much-recommended option to earn a regular income, considering it is tax-efficient and can guarantee a specific amount at the end of every month.
With an SWP plan, you can select the amount, date and frequency according to your convenience.
FAQs on Monthly Income from mutual funds
Can I get monthly income from mutual funds?
Yes, it is possible to get monthly income from mutual funds. One of the best ways is to set up a Systematic Withdrawal Plan in a debt-oriented mutual fund scheme.
Which mutual fund is best for monthly income?
While trying to generate regular income from mutual fund investments, you must stay away from something that gets severely impacted by volatility. Thus, it is best to invest in conservative hybrid mutual funds or debt mutual funds that are less volatile than equity funds and beat inflation.
Which mutual fund gives the highest monthly dividend?
Dividends are generally distributed based on the surplus that the scheme has gained. Thus, there is no mutual fund that can guarantee a monthly dividend. However, if you still wish to get dividends, you can go with the Equity Saving Funds, Conservative Hybrid Mutual Funds or the Dividend Plan of Short Duration Debt Mutual Funds.
What are the safest fixed-income funds?
Among the fixed-income funds category, the overnight fund is the safest choice. It invests in securities that mature in one day. Thus, it doesn’t have any interest or credit risk. The risk of incurring a loss with overnight funds is almost zero. Additionally, you can also go with liquid funds as they only invest in money market securities that mature within 91 days.
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