Corona Virus

We are seeing the impact of corona virus on equity market across the world . India is off course no exception as well . 

The coronavirus outbreak halted trade , tourism , consumption and many other activities. The effect of this outbreak may push China’s economy into a period of dull growth for some time.  Will it impact other economies further?  …Yes if it spreads further…..Will market falls further? …..certainly if virus stays longer.  

Markets alway give knee jerk reactions for any positive or negative events . It is always overdone in the market . 

Long-term investing is often best disconnected from short-term economic reactions. 

We have seen such epidemic outbreaks in the past . Below table provide the sense of market reactions following major epidemics in recent history.

corona virus

Carl Richard has nicely depicted current scenario in his famous sketch BehaviorGap 

WhatsApp Image 2020-02-28 at 6.05.31 PM

We have written on couple of times on different events whenever the market corrected in past .

 

CoronaVirus will be history after few months .  You need to decide where to focus  on CoronaVirus or Karo Na Invest !!!

Happy Investing !!!!

Pay Yourself First

– Meghashyam Sinkar

When you receive the salary / professional income , who do you pay first?

Do you not pay to your driver ? Do you not pay to your maid ? Do you not pay to your DTH , broadband services ? Do you not pay to employee ? Do you not pay to your milkman? Do you not pay to bank in case of EMI ?

But do you pay to yourself FIRST ?

You pay everyone for their work and services as soon as your receive your salary or profession income except YOURSELF . What about paying yourself for the work you do for 25- 30 days in a month ?

In 1926 , George Clason in this classic book “The Richest Man in Babylon” shares the secrets of creating wealth through few simple rules . It says – ‘Pay Yourself First’ 

The book says that the first principle is “A part of all you earn must be yours to keep.”

He goes on to explain that by first putting aside at least 10% of earnings — and making that money inaccessible for expenses. It should be not less than a tenth no matter how little you earn. It can be as much more you can afford .
Over and even longer time, it would grow into a lot of money, because of the power of compound interest.

Below is the simple analogy given by him in his book .

“Wealth , like a tree, grows from a tiny seed . The first copper you save is the seed from which your tree of wealth shall grow . The sooner you plant that seed the sooner shall the tree grow. And the more faithfully you nourish and water that tree with consistent savings , the sooner you may bask in contentment beneath its shade.”

Even a small amount can harness the power of compounding  and create the significant value given enough time. As the income grows, contribution grows . E.g.  A person with Rs 10 Lacs of earning keeps aside Rs 1 Lac every year for next 30 years can create a corpus of Rs. 1.64 cr. However , if the person keeps increasing the said contribution by 5% each year, then the corpus becomes Rs. 2.6 cr. That is huge difference in retirement nest.

Pay urself graph

Putting “Pay yourself First” strategy into practice will inculcate good savings habit . If you are not able to do it right now for some reason , then assess your cash flows , make budget sheet , see where you can curtail or prioritise your expenses and keep aside at least 10 % yourself first ,come what may.

Majority of the investors follow below equation

Income – Expenses = Savings . But it is conventional Thinking .

Financial Freedom thinking says Income – Savings = Expenses. So PAY YOURSELF FIRST.

The legendary investment guru Warren Buffett has quotably remarkably in simple word –

“Don’t save what is left after spending, spend what is left after saving.”

Happy Savings & Investing !!!

Illusion of Control

– Meghashyam Sinkar

Have you observed or seen anyone trying to make the call or to type the message while driving the car ? Or drinking and driving ? So, that person believes that he can control the car if anything comes in front of his car suddenly and hence he continues to do this activity with the belief that he is in full control of his future action or outcome . We underestimate risk because we are in possession of all the facts and we feel that we can control the situation when in reality we can’t.

This is called Illusion of control Bias .

Rolf Dobelli , in his book – “The Art of Thinking Clearly” shares the nice instance

Every day, shortly before nine o’clock in the morning, a man with a red hat stands at a busy traffic light and begins to wave his cap frantically. After five minutes he disappears.

One day, a policeman comes up to him and asks: “Sir! May I ask what you are doing?”

“I’m keeping the giraffes away,” replies the man.

The puzzled policeman looks around and tells him, “But there aren’t any giraffes here.”

“Well, I must be doing a good job, then.” says the man proudly.

You may conclude that the man with the red hat wasn’t in the good of his mental health. However , The man’s belief, that absence of evidence (giraffes) is a proof of his prowess in controlling giraffe traffic, is the result of a behavioural bias called Illusion of Control.

The illusion of control bias describes the tendency of humans to believe that they can control or at least influence outcomes when, in fact, they cannot.

Almost 50 years ago, a group of 3 behavioural scientists conducted an experiment. They asked people to place bets on calling the right number from a roll of dice. The dice was rolled by the persons placing the bets. For a few turns, the dice would be rolled, the outcome hidden, and the participant would be asked to place his bet on the outcome. For some other turns, participants would be asked to first place their bets, and then roll the dice. Bets could be of varied amounts each time. After gathering findings from a number of participants, for a number of attempts, the researchers found a clear pattern emerging. Bet sizes tended to be much lower when placed after the dice was rolled, and much larger when placed before the dice was rolled. Participants obviously believed in their own ability to somehow influence the outcome – which is why they were willing to place bigger bets before the dice was rolled, but much smaller bets after they had rolled the dice. A classic case of illusion of control.

Ten years after this experiment, another experiment was conducted, by a different team. Individuals were sold $1 lottery tickets. Half the participants were sold tickets that were randomly picked and given to them, while the other half were allowed to pick a ticket of their choice, after looking at number sequences and so on. A week later, on the day of the draw, just before the draw, each participant was asked to quote a price at which they were willing to sell their ticket. The average selling price asked by the group that was given randomly selected tickets, was $ 1.96. The corresponding number for the group that was allowed to pick tickets of their own choice, was considerably higher, at $ 8.67. Here again, those who picked their own tickets, had an illusion that they had higher control on the outcome, which is why their asking price for their tickets was much higher.

When you add money decision with this illusion of control bias then it becomes toxic combination . Illusion of control is often observed in stock investing, when investors who do a lot of hard work before picking up stocks believe that their hard analysis and knowledge gives them control over the future of stocks they own. If the stock price corrects then they buy more of it with the concept of averaging it out which is certainly not bad . However, sometimes investors exceed the desired weightage in stock or sector or particular asset class . 

Benjamin Graham , in his book “The Intelligent Investor” writes – 

“The only thing you can be confident of while forecasting further stock returns is that you will probably turn out to be wrong . The only indisputable truth that the past teaches us is that future will always surprise us – always !”

Individual investors don’t diversify their stock portfolio properly with defined framework. Their concentration keeps increasing if any particular stock is added with some insightful information with detailed analysis and they keep tracking it closing . The fact that they are doing things themselves give them the illusion that they know what’s happening .

Equity Traders who watch the markets quite frequently , follow all the market related information -domestic & global , always try to remain on the top of it and then apply their own analysis to take the stock position believe that they have an edge and can immediately control the situation if needed . But , Mr. Market behaves the way he wants and not what investors want .

In general, researchers have found that the illusion of control is more likely experienced  when following conditions are fulfilled:

  • One has early success at a task.
  • Many choices are available.
  • The task one is undertaking is familiar.
  • The amount of information available is high.
  • One has more control over the decision process.
  • One has a personal stake in the outcome of the choice.

How to overcome it ?

  1. The first step is to be aware of it. 
  2. Be open to the possibility of being wrong or getting wrong .  
  3. Honestly asking whether luck or just randomness played a significant role in initial success.
  4. Craft your investment plan / financial plan , define the framework and then stick to it.

Keep Learning and Happy Investing !!!

Market is falling …Again ???

– By Meghashyam Sinkar

If you are a member of active equity investors group or watching the business channels or following any brokers or any particular reports by experts , then you are bound to follow everyday market movement & end up looking at your portfolio to become more worried and anxious . Latest news senses that terrifying things are going to happen around due to poor budget, FII outflows, automobile and other industries slowdown,  poor monsoons, higher taxes on the rich, bad loans & so on . One news talks about the probability of 2008 type crisis hitting to the markets  .

First, Let us tell you that this is not the first time it is happening . For the new investors and just to brush up for our old investors , please read our earlier blogs during such challenging times .

  1. market-crashed-be-happy . written on August 2011 – fear over European Crisis 
  2. It’s different this time …….Time will only prove it !!. written on July 2012 – fear over a prolonged recession signals from developed nations and no sign of improvement at Indian Economy .
  3. Part II : ” It’s different this time …….Time will only prove it !!  Written on September 2015 –  fear over a slowdown in China.

It is always said that markets have short term memory and hence the investors .

We need to understand that the stock market moves in cycles, and thus fluctuations are inevitable.  Bhagavad Gita says – the very texture of life is of duality – pain and pleasure, success and failure , birth and death. So investing can’t be left out . It also has duality – Bulls and Bears , ups and down .

What should you do now ?

  1. Go back to your investment objective and time decided for that investment . If you have come to equity for 1 to 2 years to get quick returns …. Then loose , suffer , learn ,  and then come back as matured investor . If you have invested for long term ( Say 5 to 10 yrs ), then need not to worry .
  2. For direct stock investors – If you have bought the stocks based on the news like jet airways will be takeover by someone, Yes Bank can’t be doomed  ,Modi has got a strong mandate then particular industry and stock will outperformed , the stock is trading 52 weeks low and you got into it , your relative or friend given you a TIP ,So you can pocket  handsome profits in really short time…… Then loose ,suffer, learn , and then come back as matured investor . But if you have bought a stock at reasonable price with sound analysis and that stock is available at lower price than your purchase price , then go & buy more if you have funds or else need not to worry . Just hold it for reasonably long period of time . You get your rewards .
  3.  For MF investors specially regular investors , it is anyways good as you can buy the units at lower price (NAV) . In fact SIP investors should pray for such periods . Because they make more money in cyclic movement of markets and make less returns if market is straight northward direction.  If you are the SIP investors who have come to market after seeing the returns of 2017 – basically 1 to 2 yrs old SIP investors then continue it for more than 5-7 yrs because equity is for long term . Understand the risk in equity and learn to manage it . Read more on the risk in equity and how to manage it here .
  4. If you are still worried and nervous , then simply sell everything and go back to bank deposits or post office . Equity is not meant for you . Because a long-term view requires an ability to stomach extreme short-term market volatility.

If you wish to curtail your worries, first please stop watching/reading such media.  That will give you ample time and sense to think and you will wisely sail through it .

Market always swing between irrational exuberance to unjustifiable pessimism and this is the only reason you can make superior returns in equities . Certainly does not bring superiors returns from any asset class . Please note that if everything is certain , your returns will shrink to normal or below normal level .

If you think you get out of the market now and re-enter at lower level as it is going to fall , then you can try it that way but make sure you enter back to market . Time will prove whether the decision is right or wrong . If get it right , then don’t try it every time . It was just a luck . Don’t succumb to over confidence bias or illusion of control . If get it wrong , then loose ,suffer, learn , and then come back as matured investor.

Don’t accept anything at face value. The future is uncertain and that is only certainty about it . Listed some of the forecasts that have gone down in history books for the wrong reasons.

  1. A famous cover story run by Business Week magazine in August 1979, after the United States had struggled with about a decade of high inflation, low growth and poor stock market returns. The story appeared three years before the market set off for an 18-year rally, a period in which stocks multiplied 15 times.

27forecasts2- business week

2. The August 2000 edition of the Fortune magazine ran a famous story picking 10 Stocks to Last a Decade.

Ten years later, a portfolio comprising the 10 stocks  lost 70 per cent of its value, with only one stock posting a gain, while two firms on the list went bankrupt, one of them being Enron.

27forecasts6

3. “We’re going to reach a point where stocks are correctly priced, and we think that’s 36,000… it’s not a bubble. Far from it. The stock market is undervalued.” by James Glassman, author of the unfortunately-titled Dow 36000, who made the bold call when the benchmark was at 11,500, in October 1999.
Ten years later, the Dow was still hovering around the 11,000 mark.

James

4. In mid-1999, after earning  117.3% return in just the first five months of the year , Monument Internet fund portfolio manager Alexander Cheung predicted that his fund would gain 50% a year over the next 3 to 5 years and an annual average of 35% ” Over the next 20 years”.  The fund received more than $100 million over the next year.  But $10,000 shrunk to roughly $2,000 after the internet burst .  The fund no longer exits in its original form and is now named as Orbitex Emerging Technology Fund .

5. Silver price prediction touching Rs 100,000 level when it was Rs 70,000 level in 2012 on the ground of industrial use , consumer preference over gold , limitation of supply and so many reasons by all analysts .

There are so many such forecasts like Brexit , US election 2016  , India winning recent cricket World Cup etc .

Instead of getting panic on bad news or overoptimistic on good news , it is better to define your goals , do proper financial planning , prepare cash flow and then invest accordingly .

And remember that “Investing in Uncertain Times is almost always more profitable than investing when everything seems certain”.

Happy Investing !!!

Smart or Disciplined ???

-By Meghashyam Sinkar
Everybody knows the benefit of being self discipline in physical, mental, personal & professional life . You can achieve lot of many things being self – disciplined . One of such benefit is self control which enables to withstand temptations. 

Markets are full of temptations , predictions , emotions ( mainly fear & greed ) which can take you off the track and prevent you from remaining disciplined . This is especially relevant for investors as the impact of our decisions are typically felt over years and decades rather than just days and weeks.

Please refer the below data

PHOTO-2019-05-22-10-19-48

The above data talks a lot about time , patience , discipline & commitment and of course all of these characteristics to be in Right Asset Class which is equity .

The Legendary Investor Warren Buffet rightly said  “We don’t have to be smarter than the rest. We have to be more disciplined than the rest.” 

You can refer our old blog written on the same line in November 2011 https://pentagraphcapitals.wordpress.com/2011/11/30/time-or-timing-in-the-market-2/

Happy Investing !!!!

Tax Planning OR Investment Planning OR Both

– Meghashyam Sinkar
Last month , we have written on NPS  ( All About NPS – National Pension System). We have received lot of queries on it mainly regarding tax saving . We would like to tell you that NPS was having tax benefit for last couple of years under section 80CCD(1B) , over and above 80C limit of Rs 1.5 L . The main reason on advising it now is due to its change of tax treatment on its maturity .

There is too much focus on tax savings while investment aspects hardly get addressed . This leads to bad choices of instrument without understanding its risk , suitability & need.

In fact that some of the worst investment decisions that individual takes are with their tax savings investments .

Investors choose Equity Linked Saving Schemes (ELSS ) over other tax savings instrument just because it has least lock in period (3 years) amongst other available instruments in this space . But it is pure equity instrument which should be considered only when you are willing to stay put for 7 years & above. Lot of investors then get disappointment and never invest again . Then they commit long term savings into traditional insurance plan which hardly give any real rate of return .

Therefore , one should ideally plan for their financial goals first and then choose the investment instrument which is aligned with your goal and also gives the tax benefit simultaneously .Tax saving should be byproduct of the investment .

Avoid Last minutes tax planning . Planning in advance releases time pressure which will reduce the mistakes ultimately .

We are sharing the tax saving sheet which can be accessed by clicking on below link . You can download to see the gap and plan accordingly if any .

Pentagraph – Income Tax FY 19-20

Please feel free to write or call us for any assistance.

Happy Investing !!

HRITHIK Super Hit But in Stock Market and not in Bollywood

–  By Meghashyam  Sinkar

Bollywood actor Hrithik didn’t appear in movie screen last year . But it looks like he was busy at the Share Market . Here HRITHIK stands for HDFC Bank , Reliance , Infosys, TCS , HUL , ICICI Bank and Kotak bank . These stocks have contributed more than 70% return of entire Nifty Index . The last one year rally was concentrated to few stocks only . Rest of the stocks have lost significant amount of market cap . Due to such polarisation of Nifty stocks returns  , most of the large cap oriented diversified mutual funds have underperformed against the Nifty . Correction in Mid-caps and small-caps have made the performance of other categories of the funds also dismissal. This is the main reason of sub optimal returns across portfolios inspite Nifty surging at new heights. .

Fund Category 1-Y
Equity: Large Cap 9.36
Equity: Large & MidCap 0.42
Equity: Multi Cap 3.10
Equity: Mid Cap -5.68
Equity: Small Cap -12.00
NIFTY 12%

Source – Value Research

The basic advantage of mutual fund is the diversification which reduce the risk and generate better risk adjusted return .They do invest across 30 to 50 stocks in their portfolio which resulted the non performance over last one year .  But , if you compare the fund category returns over 5 years and above , then active funds have delivered much better returns against the benchmark generating alpha in the range of  2 – 7 %.

We , at Pentagraph, always communicate that equity returns are never linear in nature & it is the long term patience game .

Happy Investing !!!

 

 

 

 

All About NPS – National Pension System

– By Meghashyam Sinkar

NPS has been evolving continuously over last decade . Recently , Government has proposed to make the eligible withdrawal amount at the age of 60 completely tax free which makes it worth considering as a tax saving option . There has been lot of changes in investment choices as well which makes it suitable option for creating retirement corpus specially for investors who are below 50 yrs age .
  • About NPS
• Voluntary defined contribution pension system regulated by PFRDA .
• The Central Government has introduced the National Pension System (NPS)   with effect from January 01, 2004
• NPS was made available to All Citizens of India from May 01, 2009
• Similar to USA 401(K)
  • Type of accounts

•Tier I &
•Tier II

  • Investment Asset Classes and Choices
There are 4 asset classes

1)Asset class E – Equity and related instruments – Max 75% exposure one can take  – Only equities with market cap of 5000 cr and above
2)Asset class C – Corporate debt and related instruments – only in AA (PSU) and above at least by two rating agencies with maturity of 3 yrs and above.
3)􏰀Asset class G – Government Bonds and related instruments ( 90% in G sec must , 10 % across securities guaranteed by centre & states and gilt MF .
4)Asset Class A – Alternative Investment Funds including instruments like CMBS, MBS, REITS, AIFs, Invltsetc. – restricted to 5% only

There are two choices

Active Max 75 % upto 50 yrs age and then further reduced by 2.5 % every year till 60  age .

AutoAggressive (75%), moderate(50%) and conservative (25%) life cycle fund.

  • Pension Fund Manager (PFM) choices

1. Birla Sunlife Pension Management Limited
2. HDFC Pension Management Company Limited
3. ICICI Prudential Pension Funds Management Company Limited
4. Kotak Mahindra Pension Fund Limited
5. LIC Pension Fund Limited
6. Reliance Capital Pension Fund Limited
7. SBI Pension Funds Private Limited
8. UTI Retirement Solutions Limited

Note : These managers can change any time . Bidding process happen once in very 5 years.

  • Taxation

  • Charges and costing

• Initial Subscription – one time registration fee – Rs 125/- ,
• Annual maintenance cost – Rs 95/-
• Contribution charges – 0.1% of amount invested – Min Rs 10/- and max Rs 10,000/-
• Non financial request – Rs 20/- per request
• Custodian charges – 0.0032% p.a
• NPS Trust charges – 0.005% p.a.
• FMC – 0.01% p.a. which is the big plus point of this instrument .

  • Nature of NPS
  1. Minimum Contribution – Rs 1000/- p.a. ( If not done , the account gets frozen and can be reactivated with Rs 500/-)
  2. Active and Auto mode can be changed twice in a year  & PFM can be changed once in a year ( Such switches are not treated as withdrawal and hence will not be taxed)
  3. But one fund to another fund is taxed as it attracts capital gain
  4. No early exit , can do so only after completing 10 yrs .
  5. After 10 yrs and before 60 yrs , you get only 20% of the corpus and rest 80% will be converted to annuity.
  6. Partial withdrawal is allowed but with certain conditions which are    (a) You should have completed 3 yrs  (b) you can withdraw maximum 25% of your contribution amount and (3) only in below situations with requisite declaration – illness, building house , kids education and marriage , disability or starting your own venture .
  7. You get only 3 such partial withdrawals through your lifetime.This partial withdrawal are not taxed
  8. If you wish , you can defer maturity till your age of 70 yrs
  9. 60% lumps withdrawal- tax free and 40% annuity is always taxable
  • Others

• You can check the returns of NPS on www.valuereasearchonline.com  Or  www.npstrust.org.in for different choices and PFM.
• You can open the NPS account with nationalised bank or online on NSDL website.
• Once the account is activated , you can mobile app for contribution , statements , valuation etc .

Please write back to us for any query or additional information.

Happy Investing !!!!

Understanding Returns on Investments

– By Meghashyam Sinkar

“Kitna return milega or Kitna return dega” ..These are the questions we often ask while making an investments . However , there are different ways of return calculation to arrive the return on investment (ROI) based on the nature of investment like one time or regular or irregular intervals .

Let us understand different ways of calculation of returns. 

Absolute Return 

This is nothing but calculating appreciation over your initial investment in percentage terms . 

E.g You invested Rs 100,000/- in August 2013  and you have received Rs 200,000/- in August 2018 .  The absolute return in this case will be 100% 

Absolute Return = 100 * ( Amount Received – Amount Invested )/Amount Invested

= 100* ( 200000-100000) / 100000

= 100 %

It is also called point to point return . This method does not take time into consideration and hence may not give the right picture on your return on investment .

Compound Annual Growth Rate (CAGR) 

CAGR is the year-over-year growth rate of an investment over a specified period of time . This method takes time into consideration and most commonly used method of finding return on investment .This method is applicable only when there is single cash flow and the holding period is more than one year .

In the above example ,the CAGR will be 14.87% .

CAGR  =  [ ( Amount Received / Amount Invested ) ^ ( 1/ number of years ) ] -1

= [( 200000/100000)^(1/5)] -1

= 14.87%

Though CAGR is better than absolute , but has certain limitations . It does not reflect volatility because it shows steady growth rate year on year . But the returns from mutual funds, direct equity , real estate , gold  will not have steady growth rate year over year in reality.

Internal Rate of Return (IRR )

IRR is used when there are Multiple cash flow e.g Systematic Investment Plans ( SIP ) , Systematic Transfer Plan (STP) . It is used to calculate the returns given for the amount invested at a fixed interval /period . There should be equal distance between two instalments e.g. after every 1 month or 3 month or one year . 
  

Amount Invested 1 01/01/12 -5000
Amount invested 2  01/01/13 -8000
Amount Invested 3 01/01/14 -6000
Amount Invested 4 01/01/15 -10000
Amount Invested 5 01/01/16 -6500
Amount Received  01/01/17 53000
IRR 14.40%

Note : Since amount invested is an outflow from your account , put “ – ” negative sign before each invested amount and Amount received should have “+” positive sign before it .

Extended Internal Rate Of Return (XIRR)

When the amount is invested at irregular interval / period , then we can’t use IRR and thats when XIRR is used .

In above example of IRR the interval is annual , If the same amount is invested at irregular period as below 

Amount Invested 1 01/04/12 -5000
Amount invested 2  01/10/13 -8000
Amount Invested 3 05/03/14 -6000
Amount Invested 4 01/02/15 -10000
Amount Invested 5 01/08/16 -6500
Amount Received  01/01/17 53000
XIRR 16.45%

XIRR is used in case of receipt of dividends either mutual fund or stocks. It can also be used to compare two business ideas.

Awareness about calculating returns with right method for investment is one of the essential factor, to conclude good or bad investment.

Happy Investing !!! 

Old Way or New Way….

–  By Nikhil Shah

 

Each change in our surrounding is a turning page. It is about closing one chapter and opening another one. Changes brings new beginning and excitement to life.
Similarly there has been one change in tax structure after Budget 2018 for investors. Which is 10% tax on all Equity Funds.

All Equity Funds has 2 options Growth and Dividend. Below is new tax implications on both options.

Dividend – Option.
Dividend Distribution Tax – 10 %  deducted at AMC level (Mutual Fund Level ) however it is tax-free in the hands of investors .

Growth – Option.
Short term Capital Gain – Applicable in case of below 1 year which is 15%.
Long term Capital Gain – Above 1 year upto 1 lakh nil, above 1 lakh 10%

** On above surcharge and STT as applicable

There are many Investors who like to reap out regular benefits through Dividend income OLD WAY in mutual funds.
Which is now taxed @ 10% at source. Solution to this is SWP – Systematic Withdrawal Plan NEW WAY. But below are few common misconceptions between Dividend and SWP.

However if similar investors takes route of SWP (Systematic Withdrawal Plan) in Growth option of Equity Funds.

He can jot down broadly below pro’s and con’s in Growth – SWP and Dividend – Payout.

SWP – Growth Option

  • Investor own can fix date and frequency on which he requires money.
  • Investor own can fix amt or yield which he want.
  • It can be paused and restarted in between if required.
  • There is capital gain tax if in any case, which will be very minuscule over DDT.

Dividend Option – Payout.

  • Dividend date and frequency is on the discretion of fund house. Can’t be decided by investor.
  • Dividend amount or yield is also on the discretion of fund house. Investor can’t decide amt.
  • Tax on dividend paid is deducted by Fund house before it’s been paid.
  • Dividend can be paid only after profit booking by fund house.

However essence of all this is, how it could be wise for investors to shift from Dividend – Payout to Growth – SWP.
Let’s understand this practically with example .

Assume an Individual invested in any Equity Balanced Fund 10 lakhs each in both options Dividend and Growth. He got fixed Monthly payout through Dividend payout in Dividend option, similarly he fixed same Monthly payout through SWP Payout in Growth option. Same monthly payout from both investments, yet there is difference in returns as below calculation.

Investment Amt: 10,00,000/= in each option.
Assume Fund delivered return : 12% compounded annual.
Monthly SWP or Dividend Amt :  7,500/= 
Period of Investment: 5 Years

SWP : Dividend

Note:

  • Above calculation is assumption based for understanding only. Calculation vary’s case to case basis.
  • In all Mutual Funds Dividend distribution tax is reduced from NAV, i.e., you are indirectly paying the tax.  
  • When withdrawal extends more than 1 year in Equity MF SWP, gain converts to long-term capital gain which is tax-free upto 1 lakh, however above 1 lakh gain due to long term capital gain taxation above calculation will get change.
  • In SWP, every time you redeem, only a part of the redemption is your gain. And only the gain component is taxed as opposed to the entire dividend amount being taxed under the dividend option. Hence the tax is lower in systematic withdrawals than in dividends in short and long term both case.

Now you decide OLD WAY or  NEW WAY…..

HAPPY INVESTING.