Tuesday, April 24, 2018

Ensure this fund doesn't imbalance your Retirement



Ensure this fund doesn't imbalance your Retirement

Mutual fund is witnessing historical inflow for last few years courtesy TINA effect (There Is No Alternative for Investment) and Demonetization.

The biggest inflow came in category named "Balanced Fund" which is a quasi Equity category having minimum equity allocation of 65%, actually most of the time funds are having equity exposure of more than 70-75% in equity in it. This category grown the more than 9 times in last 4 year's.

The reason for big inflow was not for some genuine reason but was for the reason that many fund houses adopted a strategy of declaring monthly dividend ranging from 9% to 12% per annum.

Most of the FD investors and senior citizen tapped this category looking at high dividend payout and decreasing FD rates "without understanding risk involved."

Untill now all such investors who switched to this fund from their traditional conservative investment are having a ball of a time..but remember every party needs to end... today or tomorrow even this party will end.

My worry is for the investors who are dependent on this income. If market falls these funds will also fall in proportion to it and dividend  will make it more worse.

Just to illustrate if you had invested Rs.100000 in one of the biggest and famous balanced fund and have taken a dividend option with payout @12% per annum since 01/01/2008 with all the ups and downs it's value as on 01/04/2018 would have been 23752. It's CAGR return comes to 7.12% worst then bank FD.

Above scenerio we are discussing during a bull period where for last four years market has given us double digit returns.Think of a longer bear cycle.

Second important aspect is dividend is  taxable from this April@10%, effective rate for investors  actually work out to be  12.942% for investors.

So, if you have made such Investments in last 2 years in any such fund on advise of your banker or a MF advisor friend and you don't want your retirement to be at Mercy of a pity advise or markets, it's the best time to review such Investments.

Don't allow balance fund to imbalance your retirement.

Raj Talati

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