POSTED BY June 1, 2012 7:14 pm COMMENTS (16)ON
I have a 10 lac FD maturing on 25 June. I would like to invest this upon matuiry in 100% Debt Mutual Funds (Not in MIP where 0-20% is invested in equity). Planning to split in 3 categories of MFs.
One (20%) which I would invest for 3 Months.
Second (40%) for 6-9 Months.
And third (20%) for a little over one year.
Request you to please suggest whether to go for dividend option on Growth for each of the three categories.
From tax perspective, my understanding is, for investment period of less than 1 year Dividend Option is better. And for more than 1 year Growth Option is better.
I am in 20% tax bracket. I have an adequate emergency fund. I have recently (last month) started investing in equity MFs.
I would be investing through Fundsindia or through Hdfcfund.com if the suggested fund is from HDFC AMC.
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16 replies on this article “Suggest a few good Debt MFs”
Thanks Everybody!! 🙂
I am overwhelmed by the detailed responses everyone (Ramesh, BFA, Ashal, Others) has given me on this forum.
Its good that I asked this query well in advance from the maturity date of my FD as I have been given so many options and food for thought. I will make my mind up this week based on the various suggestions that everyone has offered me.
” are you sure that you ‘ll redeem after 3M, & 6-9 months in option 1 & 2″
Its not definite that I will redeem after 3M & 6-9. What is definite is that I will NOT need the funds before the completion of the 3M & 6-9M periods.
So 2lac invested for 3M period in what ever fund I finalize, will remain so beyond that period in the same fund selected. Or may be partially withdrawn based on the amount needed.
Similarly, I will let the 4lac invested for 6-9 period remain invested in the fund choosen beyond the period in the selected fund.
You have made a few things more clearer to me.
Growth option is better over dividend because of the compounding benfit and the less paperwork hassle.
I am shocked over the new IT laws u mentioned regarding FMPs. I did not know that and was considering FMPs as one of the options for my 1+ year investment. So as per the new law u mentioned, it would only make sense if the 370 day FMP was invested in the last week of March.
One more Shocker! I always knew the difference between the dividend and Growth. But had assumed that Growth & dividend reinvestment options were same in terms of return. The only difference I thought was that in Growth NAV increases and No. of Units remain same whereas in Dividend-reinvestment the NAV increases (not as much as Growth ofcourse) and the No. of Units also increase. The returns are higher in Growth because the units credited in the dividend-reinvestment option are acquired at a higher NAV.
That brings me to a basic question. Why is the dividend-reinvestment option in the market at all. Growth I understand. Dividend I can understand is for people who need periodic payout to meet their regular expenses.
You are right I dont need Dividend income. At this stage I am more inclined towards the growth option rather than the dividend-reinvestment (as suggested in your article in the link) coz of less paperwork, better returns though marginally less tax efficient.
Dear Ramprakash, in my opinion, invest all your money in one fund only, be it medium to long term debt fund or a gilt fund of your choice. From your query it’s clear that the 3M & 6-9M options are merely to have a liquidity window & in actual you may not redeem at all.
As the growth v/s dividend – please do understand, in Eq. funds dividends are not liable for DDT, hence the returns are same for Growth & Div. reinvestment. In case of Debt funds, Dividends are subject to DDT, that’s why the return can mot be same here for growth & div. reinvestment..
Since this is a huge investment, 8-10lac plus, I am reluctant to invest in 1 fund only.
Based on the comments and cross verifying on VROnline, I have finalized Templeton India Low duration fund (growth) for Option 1 & BSL Dynamic Bond for Option 2.
Please suggest a good debt bond for option 3 (1+ year). I dont want to use the same fund for option 2 & option 3.
Personally I don’t feel there is any harm in having multiple debt funds in one’s portfolio. Though when it comes to equity MFs, I agree 2-3 MFs may be enough.
Dear Ramprakash, for 1+Year period, you may ride the Gilt funds. Kotak Gilt Investment Regular may be a good fund for you.
Dear Ramprakash, are you sure that you ‘ll redeem after 3M, & 6-9 months in option 1 & 2? Why I’m asking so? My dear friend, if your intention is to keep the liquidity option open, you can invest in a single fund & redeem as per your choice.
From here on wards, interest rates may decline & in that case, Gilt funds are a better option to reap higher returns. This is in addition to the funds already discussed above. Please have a look at this aspect also.
FMPs are a good option, but that would mean that you would loose the liquidity in your investments. FMPs won’t give you a major return over and above Liquid Funds – max diff would be 0.5-1%. The advantage which liquid funds would give you is the power of liquidity. Encash when you find a good investment opportunity.
The rationale behind Div-reinvestment was two folded :
1. You get taxability of Dividend – 15% CDT making it tax free for you, bringing down your tax liability from 20% to 15%
2. Since you don’t need Dividend income, the same is useless if lying in your bank account. Hence Re-inv option shall plough the same in your Fund.
What I have written in my article is general detail and the exact option needs to analysed for each specific case.
Hope it answers your doubts.
Considering that you have already made your mind about not going with MIPs (which I would have advised if you have over 1 year horizon), i can suggest the following options :
1. For over one year, you can go with BSL Dynamic Bond Fund – Growth Option. This option will create a Long term capital gain which you can tax it at 10% without indexation.
2. For upto 9months – 12 months duration, go for HDFC Cash Management Fund – Treasury Advantage Plan – Dividend Reinvestment Option. This would generate Tax free dividents after deduction of around 15% DDT. This would be most convenient for you considering you would be doing it via HDFCFUND.com
Considering you are in 20% bracket, this may work the best for you. The payout options is a bit technical when it comes to debt / liquid funds. You may want to refer to http://insight.banyanfa.com/?p=700 which details upon the rationale to select the right payout option.
Once again, if you have an outlook of just over 1.5 years, it is the best time to invest into MIPs. You may want to consider pushing 100K into MIP right away.
Thanks BFA for your valuable inputs. Very well written and informative article.
I do not want to invest in MIP because for short term I do not want to risk the returns from the equity exposure component in it.
Why are FMPs not recommended as these are for typically366-370 days which would also suit me in terms of the investment duration.
Doubt: Why did you suggest the HDFC Cash Management Fund – Treasury Advantage Plan – Dividend Reinvestment Option and NOT Dividend Option. Because in your article you were against the Dividend Reinvestment Option
For options 1 and 2 (3 mo, and 6-9 mo), use Templeton India Low duration fund (growth) [it has a penalty of 0.5% if you withdraw within 90 days].
For option 3, you can use Templeton Income Builder plan b (growth) or the above one (since 1.x year is also a short term option only) [penalty of 0.5% within 180 days].
I have a doubt.
For option 1 and 2, is quarterly dividend not a better option than growth?
Because for short term (< 1 year) growth option will invite tax as per tax slab. (20% in my case)
Where as the dividend option will apply around 14.xx % tax.
Do actual calculations and post the results here for 90days, 91 days, 4mo, 6mo, 9mo. You may be in for a surprise.
Also dividend distribution may occur after 1mo also in case of quarterly payout because of time of purchase.
I still dont get it. Donno what I am missing.
From what I understand, the law only diffrentiates if the duration is =365 days.
So for 90 days, a 1 lac investment @ 10% annual return, in growth option, will give approx 2.5K return pre tax and 2k Post tax (20% tax slab).
For 90 days, a 1 lac investment @ 10% annual return, in dividend option, will give approx 2.125K return pre and post tax (15% tax).
The return of funds (which have to pay DDT) are different between dividend options (includes payout and reinvestments) and growth options.
In simple language, the DDT component which the fund pays as tax DOES NOT get compounded over the period and decreases the overall return. The longer the duration the larger will be the difference between the growth and the dividend option (growth being more than dividend).
Also, dividend reinvestment return will lie somewhere in between the growth and payout options. The above is true in increasing trends (and opposite is true in decreasing trends, etc).
eg. BSL Dynamic Bond fund invested on 5th Jun 2011 (i arbitrarily took a less than 1 year option). The returns on Rs 1 lakh deposited in that fund in various options will give you:
1. DM monthly- dividend payout = 7511 over 11 installments (varying from 551 to 1180, very variable though) and currently 160 extra in the total amount – on which you will pay 20% (so make it 128). Total amount in your hand 7640).
2. DM monthly- dividend reinvestment= 7949 over and above your principal, which are tax-free in your hand today. Total amount in hand = 7949.
3. Growth option=10,498 over and above your principal, which is taxable at a flat-rate. At 20%, it will amount to 2100, which gives you 8400 in your hand.
The more the amount and duration, more will be the difference. There is an added advantage of less paperwork.
You can do this with other funds and other periods and check for yourself.
HI DEAR RAMPRAKASH AS PER AS YOUR REQUIREMENT FIRST TWO PART YOU SHOULD GO FOR FMP OF MUTUAL FUND BECAUSE THERE IS VERY GOOD CHANCE OF RATE CUT IN COMING DAYS THE YIELD OF THE OTHER DEBT FUND MAY BE FALL BUT IN FMP YOU WILL GET THE FIXED YIELD AND AS PER OPTION IS CONCERN YOU SHOULD GO FOR DIVIDEND OPTION FOR YOUR TAX BRACKET .FOR THE FUND MORE THAN ONE YEAR YOU CAN GO FOR THE FMP OR YOU CAN TAKE LITTLE RISK AND GO FOR LONG TERM GILT FUND THE REASON IS THE SAME CHANCE FOR RATE CUT YOU MAY GET EXTRA RETURN. THE GILT IS RISKY WHEN INTEREST RATE GET HIGH BUT BUT THERE IS NO CHANCE FOR INTEREST RATE GET HIGH AND YOU SHOULD GO FOR THE GROWTH OPTION SO WHERE THE MAX TAX WILL BE 10.3% AND LESS WITH BENEFIT OF INDEXATION THANK BEST OF LUCK
MUTUAL FUND ADVISER
[removed contact no, as per forum-policies]
Please use small caps and not CAPS for answering. It is difficult to read. Thanks.
Also please check the latest IT rule changes regarding which FMPs (or debt funds) are said to be considered for long-term capital gains tax. Previously, they used to be calculated on basis of date of purchase – more than 365 days was long-term. Nowadays, it is from 1 extra FY- which translates to end of this FY plus the next FY (the end date should be 1st april 2014, nearly 21 months ahead). Please confirm and post.
Regarding rate cuts, it is anybody’s call. But for short term, there is no need to be greedy and take risks in rate-sensitive Gilts, etc. Eeach to his own. Even in rate cuts, short term funds will not lose much.
Dear Vikash, it’s my humble request to do not use ALL CAPS while replying to any query. Regarding the solutions offered by you, let Dear Ramprakash decide.