Wealth Consumption – Regular income funds: Pension funds or Post Retirement funds

Wealth = EFFORT * TIME

A Wealth is created through a continuous journey of EFFORT over a period of TIME.
When you create a wealth, you expect the wealth to pay back through

  • Regular income
  • Tax efficient
  • Capital appreciation
  • Beat inflation

SWP or Dividend plans :

SYSTEMATIC WITHDRAWAL PLAN can turn out to be an excellent investment option to save TDS compared to Dividend funds. In a dividend option, you pay tax upfront. In a SWP option, you will have to pay tax when you withdraw – LTCG.

Individuals looking for a regular income from their investments often go for regular dividend funds. But TDS deducted at source in these funds. So choose SWP.

We have two major options:

1. Conservative Hybrid funds :Debt Hybrid funds

As the name goes Hybrid funds are a combination of Debt funds and Equity funds. In a debt Hybrid, Debt funds will be more than 65% and the balance will be equity. Here you Get Indexation benefit when you stay invested post 3years. This means you have to pay tax based on your income slab post inflation.

Say your interest income is 8% average for 3yrs and the inflation index’s average inflation is 5%. You pay tax only for that 3%. In fixed deposits, you pay for the entire 8%.

Additionally, since you have exposure upto 35% Equity, you can get higher returns than Fixed deposits over a medium to longterm tenure. These are called Conservative hybrid funds

2. AGGRESSIVE Hybrid funds: Equity Hybrid funds:

In case of Hybrid funds, Equity funds will be more than 65% and the balance will be debt. Here you have to pay LTCG – Long term capital gain tax when you withdraw.

Now upto 1lakh gain tax is exempted. Above 1Lakh it is taxed at 10% irrespective of your tax slab. Even if you are at 20% or 30% tax slab, only 10% is your LTCG.

As the is equity exposure is high, return potential is high. But at the same time look at a minimum 5 to 7years horizon. These are called Aggressive hybrid funds.

Choices:

  • Equity & Debt funds: Aggressive funds
  • Balanced advantage funds: conservative with Arbitrage strategy
  • Multi-asset funds: it’s a mixture of Equity, Debt & Gold.

Fund of funds:

This category is Dynamic asset allocation strategy. In this fund, a portfolio is invested in equity and debt mutual funds of the respective AMC’s. Here the fund managers has no capping of 65% equity or debt. Depending on market valuation, a fund manager can even decrease equity or debt to even to 0%.
Additionally, this is classified under Debt taxation. So if you stay for more than 3years, you can get indexation benefit.

Following the 3 things you should always remember before investing in Mutual Funds :

  • Never invest based on past returns. Invest based on the duration you want to invest for.
  • Every person’s financial condition is different. Choose the funds you invest in yourself – don’t invest in a fund because of its popularity.
  • Review your investment once a year and remember why you started.

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