‘Growth options are more tax-efficient’
Chennai-based septuagenarian Viswanathan, who retired as financial executive of a leading South-based conglomerate, has been investing in mutual funds for almost two decades. He prefers the growth option in both equity and debt schemes.
“Many of us look at the return potential of any investment proposal. But I believe that one should not base their investment decision merely on the absolute return, but should focus on the returns available after adjusting for tax.” He prefers debt mutual fund schemes over fixed deposits, as the former are more tax efficient and more liquid.
“In a debt mutual fund, if you withdraw after three years, you pay lower tax than in a fixed deposit. The dividend option is not preferable given the high dividend distribution tax. Even if you need money before three years, you can do a systematic withdrawal from the debt fund. That will be more tax efficient for people in the 10-20 per cent tax bracket” explains Viswanathan. Going for a dividend option in a debt fund means investors forgo a portion of their gains as the fund house deducts dividend distribution tax from the realisable value.
Talking of equity funds, he says “When you invest in an open ended equity fund you have the freedom to withdraw/redeem whenever you want. So why wait until they declare dividend?” In case of any emergency one can redeem a portion of the investment.
“If you withdraw from an equity scheme after a year, you enjoy tax-free return” he explains. “I feel given the current tax regime, growth options are more tax efficient. My advice is that one should keep in mind the tax angle before making investment decisions” he sums up.
‘They are better for the long term’
Another septuagenarian Amar Chand Verman also bats for the growth option. Interestingly he started investing in MFs only eight years ago – towards the fag end of the last rally which ended in 2008. “I was quite a conservative investor and had invested most of my retirement proceeds in post office savings schemes and fixed deposits until eight years ago.
I was first introduced to mutual funds by my investment advisor who advised me to invest in a systematic manner using the SIP window. I have been a diligent MF investor since then,” he says.
From his experience he swears that equities, particularly through the mutual fund route, are the best investment class from a return perspective. “And when you take the MF route the risk is much lower than buying shares directly, but at the same time the returns are attractive,” he asserts.
Why growth option? He explains “When you invest in mutual funds, it is important to stay invested for long to help your money grow. And growth option is the best way to grow your investment.”
He does not look upon mutual funds for his monthly cash flows. “I have invested a portion of my corpus in regular income yielding schemes such as post office savings schemes and FDs and hence do not expect any dividend income from my mutual fund investments” he explains. “I lead a very active lifestyle, go for morning walk, eat healthy food, do yoga and exercises and have been fairly healthy so far. Also my wife and I lead a very simple life and hence our monthly financial needs are limited” he says with a smile.
They plan their monthly expenses well and save at least 25 per cent of their monthly investment income.
“I have not only saved enough for my wife to be financially independent after my lifetime, but have also taught her about investing,” says an inspiring Verman.
‘Benefit from compounding’
Shyam Sundar, who is in his late fifties and works for a private company, believes that mutual fund investments are for the long term.
“I strongly feel that one should remain invested in equity mutual fund schemes for a longer period to benefit from the upside in equities. For this you need to invest in the growth option, because dividend option will deprive you of the benefit from compounding,” he explains. He believes that it is important to invest systematically in mutual funds to build a corpus. “You need discipline with MF investments and patience to allow the investment to grow,” he explains.
He feels growth option is the best way to achieve this.