Generate more returns with Liquid SIP Strategy

SIP is meant to be a vehicle for disciplined, regular, long-term investment on an auto pilot mode. It is meant to average rupee costs and provide an opportunity for all – those with limited as well as high savings – to participate in smart investment options.

Whether you invest Rs 1,000 a month or Rs 10,000 a month, rupee cost averaging works alike for all. You buy through ups and downs using an SIP, whether you are a small retail investor or a High Net-worth Individual (HNI).

Equities generate returns when they traverse across up and down market cycles – providing you opportunities to buy cheaper in down cycles and generate wealth in up cycles. SIPs, by their very nature, help you navigate these market cycles by averaging costs.

Can You time the market better?

Well, perhaps you can. But can you do that every time? Moreover, if many people could do that, then there would not be many market opportunities in the first place. Besides, there are so many extraneous factors that always belie even the top investment gurus.

Due to multiple known and unknown factors, market fluctuates at various levels and exhibiting volatility. These market fluctuations are harder to predict by most of the investors. It is the time in the market that matters, not timing the market. Hence, if you come to terms that you cannot always time the market, you would simply run an SIP and allow your SIP to time your investments well for you. And that too, even while on an auto-pilot mode! Of course, nothing prevents you from adding to these SIPs with occasional lump sums.

But will there be lump sum available at that particular down market cycle when the NAV reduces in that particular SIP Folio? 

May be not all of you will have lump sum investments to average it.

We at Ventura Suceder has a solution for this….

Lets allocate 10% of our equity SIP Allocation in Liquid Funds with the same folio number and use the NAV alert option from our portal. As and when the NAV comes down, we get an alert and can switch the amount of liquid folio to Equity Folio. So we are averaging costs by starting an SIP in Equity and further averaging with liquid fund available in the same folio.

Analysis :

If we have allocated some amount separately for the above mentioned equity funds to average in the down market cycle we would have invested at a discounted price in 3 instances which occurred at 3 months back, 6 months back and 1 year back.

In worst case we can average our Investment yearly once...worst to worst case we can average every 5 yr as there will be an election year in India. This would generate more Alpha for our Investments.

My conclusion and advice to all the Ventura Suceder clients is to start LIQUID FUND SIP ( 10% of your existing Equity SIP) to double average your investments. We shall allocate this to the same folio number of your existing equity fund, utilise NAV alert option, switch at right time and generate more returns. 

LTCG : Impact on Long Term Goals of Ventura Suceder Clients

The government has proposed to impose long term capital gains tax of 10% on equity funds in The Union Budget 2018-19. However, this tax is applicable only if the capital gains exceed Rs.1 lakh. Equity as an asset class delivers superior returns over all other asset classes in the long run. This was true when there was no tax and continues to be true when there is a 10% tax.

We (99% of Ventura Suceder Clients) are strictly following our PFP sheet whenever we are planning to start or increase our investments. We have fixed our goals as per the inflation, PV (PRESENT VALUE) and assumed a return of 12% to reach the FV (FUTURE VALUE).

• Impact on Long Term Goals : LTCG is 10% on profit .... If 12% is our expectation to reach our goal which is 20 yrs ahead,then the fund should give 13.3 % returns , so that post LTCG  ( 10% of 13.3 is 1.3) net return is 12%. We would be on right track for all our goals inspite of paying LTCG if our net return is more than expected return.
  ​We can track this in our Goal Wise sheet in our Portal.
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  Morever this rule applies till 2019 March i. e, 14 months more.But our goal is 20 years ahead. We will comfortably reach our goals inspite of this rule getting continued.

Now that you are aware of the changes, what you need to do? Nothing. Just continue to stay the course, as always.

Analysis : 

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Start with a 1 Lakh investment for 20 Yrs @ 12%.

​1) Sell the investment at the end of the year, pay the tax and reinvest the proceeds.Do the same thing every year for twenty years. 

​           ​

End up with 7.78 lakh clear profit.

​                                                          

(Or) 

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2) Don’t sell anything. At the end of twenty years, end up with 8.78 lakh after-tax profit.

      

See the difference in long term wealth creation when there is no churning.We advised no churning even when there was no tax on long term capital gains. It now becomes all the more important to keep the churn very minimum.

 What investors should do?

There is no real reason to panic at all at an individual level. Investors shouldn’t bother about falling markets and keep on investing in equity-oriented mutual funds based on their personalised Goal wise plan. Introducing 10% capital gain tax on long term gains is more of a sentimental blow and the fundamentals of the Indian markets wouldn't change because of this.

• As far as MF goes most of us are doing it for some long term goal and we can just continue to do so. Yes, you will pay some taxes on future gains but not on your past ones. Investors doing SIP should simply continue, you may now want to bump up the amount by 10 % to take care of the taxes when you redeem. Note that this is mainly true for the Growth option.
• Continue with SIP in your MF investments, look into increasing the monthly outlay to take care of the eventual taxes.

Read this carefully in case you are not sure when should you redeem your mutual fund:

·       When you have met your financial goal 

·       When you need to rebalance your portfolio 

·       When your mutual fund scheme underperforms consistently

·       When there is a change in the fundamental attributes or investment objective of the        scheme

·       When you find a better alternative

​This is not a generalised article on LTCG. It applies only to Ventura Suceder Clients ​as we are doing Goal wise plan. 99% of Ventura Suceder clients are following this process.I request the remaining 1% clients also to follow the Goal Wise plan to achieve our Goals comfortably.

Loan against mutual fund units

When there is urgent need of money for short tenures such as three months to a year, one option is to borrow against your mutual fund units. It is similar to an overdraft facility on a bank account, and the advantage is that you do not have to prematurely redeem your units, nor does your SIP get affected. 

How can you get a loan against your mutual fund units? What would it cost? 
Loan against your equity or hybrid mutual fund units could be taken from a bank or a non-banking finance company (NBFC) by pledging your mutual fund units. 

You can pay back the loan at the interest rate agreed with the financier. Depending on the quantum of loan you take and the tenure, the interest rate could be in the range of 10-11 per cent on these mutual fund units. When the units are under lien, you cannot sell or switch the units. 

How does one apply for a loan?

Some online portals offer you loans, if you hold units in demat form and have a prior approval. If you hold units in physical form, you first need to execute a loan agreement with your financier. (Ventura Suceder takes care the entire process)

The financier will write to the mutual fund registrar like CAMS or Karvy and ask them to mark a lien on a certain number of units that are being pledged. 

Financiers typically lend about 60-70 per cent of the value of the pledged units. The registrar in turn will mark the lien and a letter is sent to the financier with a copy to the investor confirming the marking of a lien on the units. 

How can the lien on the mutual fund units be removed? 
Once the loan is repaid by the borrower, the financier can ask for removal of the lien and send a request letter to the fund house. A financier can also request for a partial removal of lien in which case, lien on some of the units will be removed and these units are Rs free' units. This can happen when financiers receive part payments. 

What happens if the investor defaults in making payment to the financier? 
In case the borrower defaults in making payment, the financier can enforce the lien i.e. send a signed request to the mutual fund to redeem the units and send the proceeds cheque to the financier. 

What is the advantage of borrowing against your mutual fund units? 
Loan against mutual funds gives you the option of receiving immediate liquidity against the mutual fund units that you own. It is like an overdraft facility for short-term monetary requirements, with a relatively shorter tenure than other loans. 

It is a beneficial monetary tool for those looking to leverage their otherwise idle mutual fund investments, and also raise capital quickly for short -term financing needs. You need not sell your mutual fund units, hence your financial plan remains intact and neither is your ownership of fund units divested after pledging them for a loan.