I am 31 now in MNC. In early days, I have invested in hdfc balance advantage fund dividend option to get passive and additional income. Now employed in MNC getting a decent salary now the dividend not required forme even as passive income,...

I am 31 now in MNC. In early days, I have invested in hdfc balance advantage fund dividend option to get passive and additional income. Now employed in MNC getting a decent salary now the dividend not required forme even as passive income, also giving tax burden, moreover the HDFC BAF dividend fund has grown well apart from giving dividend my purchase nav was ₹.24 now it ₹.45. Please guide me should I switch to one withdrawal or by STP where both involves tax burden or in batches to match every year. 1, if withdraw one lot LTCG but save dividend taxing 2. If STP no or minimum tax on LTCG but dividend is tax pressure 3.if withdraw in batch both LTCG and dividend 4. If I do nothing and to allow it grow in dividend though I set dividend transfer to growth fund this dividend gives tax pressure. I don't require this dividend or accumulated funds in Dividend option any more say for next 25 years Can you please Guide me and throw light to ease the situation

Ans: Hi Mani,

Unfortunately there isn't any direct option to switch from Dividend option to growth or any other option.
You can withdraw the amount in batches so that the maximum gain in one financial year does not cross Rs. 1.25 lakhs as 1.25 lakhs LTCG is tax exempt. So if you withdraw gains worth 1.25 lakhs, you will incur the dividend tax on the remaining amount till next FY.
This is the best option for you to exercise.
You can share your net salary details and total invested amount in this MF along with current value for me to guide you better.

Best Regards,
Reetika Sharma, Certified Financial Planner
https://www.instagram.com/cfpreetika/

Hi Gurus, I hope you're doing well. I would appreciate some advice regarding my current investment strategy. Here’s a summary of my situation: I am a 72-year-old retired male, and my primary sources of income are from my investments and a rental income of around Rs. 6,000 per month. I need at least Rs. 40,000 per month to cover my expenditures. I initially invested Rs. 51 lakhs in the HDFC Balanced Advantage Fund (Retail) IDCW about 4 years ago, where I received annual dividend yields of around 20-22%. Recently, my distributor suggested I switch to the HDFC Multi Asset Fund (G) with a Systematic Withdrawal Plan (SWP) of Rs. 34,000 per month starting May 2024. However, I've observed that this new fund hasn't performed as well as others like the HDFC Infrastructure Fund, HDFC Pharma and Healthcare Fund, and HDFC Multicap Fund. Last month, I decided to move Rs. 7 lakhs back into the HDFC Balanced Advantage Fund (IDCW), which now has the following details: HDFC Balanced Advantage Fund (IDCW): Current value Rs. 7,94,744, with an annualized return of approximately 11.52% (0.96% monthly). HDFC Multi Asset Fund: Current value Rs. 45,40,044, with a return of Rs. 3,25,000 (7.71%) over the past year. I am considering reallocating the amount in the HDFC Multi Asset Fund to a mix of the HDFC Pharma Fund, HDFC Infrastructure Fund, and HDFC Multicap Fund. However, I would incur an exit load and Short-Term Capital Gains tax amounting to approximately Rs. 1,20,000. Given my need for a steady monthly income and the potential for higher returns from the funds mentioned, I would appreciate your advice on whether this reallocation is a wise move despite the associated costs. Thank you in advance for your insights!

Ans: Your primary concern is achieving a steady monthly income of Rs 40,000. Currently, you have Rs 6,000 in rental income, and the bulk of your income relies on your investments. Your investment strategy has evolved over time, but now you are re-evaluating your portfolio for better returns while keeping income stability.

You are also aiming to maximise returns by exploring different mutual funds. But you need to balance between income generation, tax efficiency, and portfolio performance. Let’s break down the different aspects of your current financial scenario.

Evaluating Your Current Portfolio
You have invested Rs 51 lakhs in a balanced advantage fund four years ago, and it has been yielding 20-22% annually in the form of dividends. However, you switched a major portion of this investment to a multi-asset fund, which has yielded lower returns compared to other sector-specific funds.

Key Points:

The HDFC Balanced Advantage Fund has given you a healthy return of 11.52% annually.

The HDFC Multi Asset Fund has returned around 7.71%, which is lower than your expectations and the other funds you are considering.

You are considering moving this to sector-specific funds (Pharma, Infrastructure, Multicap) which have higher potential returns but also carry specific risks and volatility.

The Role of SWP for Monthly Income
Your decision to opt for a Systematic Withdrawal Plan (SWP) of Rs 34,000 from the Multi Asset Fund starting in May 2024 seems to align with your need for steady income. But we need to reassess if this fund can continue to meet your income requirements without depleting capital too quickly.

SWP Advantage: It provides a steady monthly income. However, if the underlying fund’s returns do not match or exceed your withdrawal rate, you might see your capital eroding over time.

Current Withdrawal Rate: With Rs 34,000 per month from Rs 45,40,044, your withdrawal rate is around 9%. This could strain your capital if the fund continues to perform below expectations.

Impact of Switching Funds
You are contemplating switching to sector-specific funds like Pharma, Infrastructure, and Multicap. Sector funds tend to outperform during favourable market conditions, but they come with higher volatility and risk.

Sector-Specific Funds: These funds can give higher returns, but they are cyclical and can underperform during certain market phases. You should be cautious about investing a significant portion of your portfolio in such funds.

Exit Load and Tax Impact: The Rs 1,20,000 exit load and short-term capital gains tax can impact your returns. Before making any switch, it’s essential to weigh the cost versus the potential gains from the new funds.

Evaluating Your Investment Goal
Your goal is to earn Rs 40,000 monthly to cover your expenses, and you are relying on your mutual fund investments to achieve this. At 72 years of age, your investment approach needs to be balanced, with a focus on capital preservation along with generating income.

Balanced Advantage Fund: The Balanced Advantage Fund has already served you well, offering you steady returns and dividends. It continues to show stable returns of around 11.52% annually. This fund's balanced strategy might be more suitable for your retirement phase than volatile sector funds.

Multi Asset Fund: The Multi Asset Fund, though yielding lower returns at present, is designed for lower risk and more diversification across asset classes. While the performance may not match that of sector-specific funds, it offers more stability, which is crucial for retirement.

Diversification: Instead of moving everything into sector funds, you might consider a more diversified approach. Diversification across sectors and asset classes ensures that you are not overexposed to market cycles in a specific sector like Pharma or Infrastructure.

Reconsidering Sector-Specific Funds
Sector-specific funds, while offering potentially higher returns, also come with higher volatility. The Pharma and Infrastructure sectors, for example, can swing based on specific economic, political, or regulatory changes.

Pharma Fund: The Pharma sector can be unpredictable. While it has seen growth during certain periods, it is sensitive to changes in global healthcare policies, regulations, and demand-supply shifts.

Infrastructure Fund: The Infrastructure sector has potential, especially during times of economic expansion and government focus on infrastructure development. However, it tends to underperform during periods of slow growth.

Multicap Fund: This can provide a more balanced exposure across large, mid, and small-cap companies. It offers a combination of growth and stability, but its performance also depends on market conditions.

Given these risks, allocating a large portion of your investment to these funds may not align with your need for stability at this stage of life.

Capital Preservation vs. Growth
At your age, capital preservation should be a priority. You need to balance income generation with the preservation of your principal. A portion of your portfolio should focus on steady returns without too much volatility.

Balanced Fund and Multi Asset Fund: These funds have shown more consistent returns with lower risk, which is crucial for maintaining a stable income stream. They might not give the highest returns but ensure that your capital is not eroded due to market fluctuations.

Sector-Specific Funds: A limited allocation to sector-specific funds can provide growth. However, it’s important not to overexpose your portfolio to these funds. You could consider allocating 10-20% of your portfolio to these funds if you are comfortable with the volatility.

SWP Strategy for Steady Income
You mentioned starting an SWP from May 2024. This is an effective way to ensure a regular monthly income while allowing your investments to grow.

SWP from Balanced Advantage Fund: Given the consistent returns from your Balanced Advantage Fund, it might make sense to set up an SWP from this fund rather than switching entirely to more volatile funds.

Multi Asset Fund: You may continue the SWP from the Multi Asset Fund, as it offers lower risk. However, it is essential to regularly monitor its performance.

SWP Flexibility: You can adjust your SWP amount over time based on the performance of your investments. This will help you maintain a balance between income and capital preservation.

Final Insights
Considering your need for a steady monthly income and long-term capital preservation, you should focus on maintaining a balanced and diversified portfolio.

Balanced Advantage Fund and Multi Asset Fund: These funds provide more stable returns and align with your need for lower risk and steady income. You should continue with them as your core investments.

Sector-Specific Funds: You can allocate a small portion of your portfolio to sector-specific funds like Pharma, Infrastructure, and Multicap for higher returns. However, do not over-commit your capital to these funds due to their inherent risks.

SWP Strategy: SWP is a reliable option for generating monthly income. Setting up an SWP from your Balanced Advantage Fund or Multi Asset Fund will provide a steady cash flow while keeping your capital relatively safe.

Tax and Exit Load Considerations: The Rs 1,20,000 in taxes and exit load should be carefully considered. Unless the new funds offer significantly higher returns, these costs could negate any potential benefits.

Portfolio Monitoring: Regularly review your portfolio's performance and make adjustments as needed. Your financial needs and the market environment can change, so a flexible approach is essential.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in