Regular Income through Mutual Funds

Earlier we had spoken on how to get regular income month after month. We had said we put some money in Fixed Income generating securities, Income funds, Dividend yielding shares and Equity mutual funds. I don’t think we need to go into Fixed Income generating securities, since this is where most of us invest without thinking viz. Bank deposits, recurring deposits, Post office monthly Income schemes, etc.

In the last article I spoke of dividend yielding shares. Now let us look at Mutual funds. Before we move into mutual funds, we need to understand the basics of Mutual funds. Whenever we buy or sell mutual funds, we actually buy or sell units of mutual funds. How are these units priced? Since they are not traded on the stock exchange, unless they are Exchange Traded Funds (ETF’s), the pricing of mutual funds is based on NAV’s.

What is NAV?
NAV is Net Asset Value, as the name suggests it is arrived at after dividing the net assets of the mutual fund (current value of securities and cash and reduced by the liabilities, if any) by the number of units outstanding.

NAVs are also used to track the performance of the mutual funds. Unlike the prices of stocks which keep changing every second, the NAV is calculated based on the closing prices of the stocks held by the mutual fund. NAV is an important tool to see the returns on your mutual fund investments.

You can keep a check on the NAVs to see the performance of your mutual fund.

The purchase or sale of a unit of mutual fund is its NAV plus or minus entry or exit loads if any.

Entry load is the extra amount you pay when you invest in a scheme. It is also called front-end load or sales load.

Exit load is the amount collected when you are selling or redeeming units.

Effect of dividend payout on NAV
While analyzing a mutual fund scheme on the basis of its NAV performance, you must also check, whether the scheme is a dividend paying scheme or a growth scheme. Usually a mutual fund would have options, dividend and growth. In case of a dividend paying scheme, the NAV shall not reflect the actual returns of the scheme, because, each time when the dividend would have been declared, the NAV would have come down to off set its effect.

As mentioned earlier NAV is the net asset value and the NAV would go down since cash would get reduced from the assets when dividend is declared. If you compare the same scheme with dividend payout and growth option you would discover that the NAV of the growth option of the same scheme is much higher than that of the dividend option scheme.

It is always prudent to judge the performance of a mutual fund by analyzing the NAVs of its growth schemes.

How to get income month after month
What is said above is fine; we will see details about mutual funds in another article. Our main concern is we need to get income month after month; how do we go about achieving this. After going through the performance we decided which funds are good for us.

But does this assure us regular income? First thing to remember, mutual fund returns are not assured. All funds have a pattern of dividend declaration. Check the pattern and choose funds in such a way that we would get some dividend every month. By this we have done 2 things. Ensured that the funds selected are good and also we get income every month.

After saying all this, we need to regularly monitor our funds performance with some benchmark. In case we notice the performance is going down, we should move the funds to another scheme. After all we want regular income.

Dividend Investing

Over the last year or so we have seen a lot of ups and downs in the market. In this type of market buying and selling of shares by trying to time the market is like playing with fire. Another option is to look at dividend yield stocks. Dividend is a tax-free income. Investing in stocks which give regular dividends is called dividend investing.

Investing in good dividend yield shares dual advantage of a consistent cash flow in the form of dividend and potential for capital appreciation. (Dividend Investing + Capital appreciation = Great Returns)

Dividend investing focuses on identifying solid companies with a record of growing their dividends each year; and an expectation that it will continue to do so in the future. History has proved that stocks that pay constant/growing dividends have always out-performed those that don’t give any dividend or have inconsistent dividend payout history.

Dividend investing is usually considered safe in all market situations. It provides diversification and thus reduces investment risk.

Spotting a Dividend Yield Stock

Dividend yield is the dividend per share divided by price per share. In the last one year stock prices have crashed, so the dividend yield has gone up. However, one should not aim at accumulating stocks with high dividend yield because such high yields may not be sustainable in case profit falls due to economic slowdown.

There are several other things to look out for in a stock before considering it a dividend counter to invest in. Some of the determining factors include:

1. A company that has a history of paying a consistently growing dividend is better than the one that pays a consistent, but steady dividend. And the consistent but flat dividend is better than a company who has had to cut its dividend.

2. Whenever a company pays dividend, it has to pay cash. That means the company is able to generate cash from its operations to pay the shareholders. Cash flow is King. A company that generates a steady or growing operating cash flow is better able to fund a dividend than a company that cannot consistently generate cash. But take care of companies which pay dividends out of cash generated in the earlier years. Look at the cash flow statement.

3. The stronger the balance sheet the better. Stronger here meaning less debt. A company with no bank debt has a stronger balance sheet because it can borrow if necessary to support operations and the dividend if need be.
4. Keep clear of companies with high fluctuations in profits. As we all know that investing in stocks is risky
   

Returns of Rs.50,000/- per month

The other day a friend of mine came to me and said “I want to get a steady income of Rs. 50,000/- per month, what should I do?” The option of job or business was ruled out, since he did not want to work for the money, but wanted his money to work for him. Does this not sound like the book “Rich Dad Poor Dad”? I also thought about this book, when he said I have another option of rental income.

He mentioned that rental income was a good option, since he would get regular income as well as appreciation in the value of the property. But here again you would have to keep following up, running to the registrars, brokers around you and other normal fears of getting a good customer etc.

So let us see what other options we could think of for this gentleman. There is this option of interest and dividends. This is a very good option. We have to look at it very carefully. Interest is assured return, nothing to worry. Low risk, steady and assured returns, but returns are usually low. As it is normal, low risk low returns.

We should also look at dividends. Dividends would be of 2 types, shares and mutual funds. The assumption is we look at only those shares and mutual funds which have been giving regular dividends year after year. Yes, we are looking at dividend yield shares.
A thing to remember is Interest is taxable and definite but dividend is tax free but variable.

Taking the points mentioned above into account, a suggestion is invest around 25% of the corpus into fixed income securities taking current scenario into account the post tax return on fixed income securities is around 8%. Another 25% could be put into Income funds, the returns on this is around 10%.

The balance could be put in dividend yield shares and equity mutual funds, the average returns on this is around 15%. Now these are all average returns per annum, taking the economic scenario at any time the return could go up or down.

So if you have a corpus of Rs. 50 Lakhs, you could easily achieve the target of Rs.50,000/- a month. How?

Type of security	Investment	Income per month	Post tax rate of return
Interest bearing securities	Rs.12.50 Lakhs	Rs. 8,333/-	8%
Income funds	Rs.12.50 Lakhs	Rs. 10,417/-	10%
Shares	Rs.12.50 Lakhs	Rs. 15,625/-	15%
Equity Mutual Funds	Rs.12.50 Lakhs	Rs. 15.625	15%
Total	Rs.50.00 Lakhs	Rs. 50,000/-

Money saved from short term business trips

Many of us go on business trips abroad. During such trips we are paid a fixed amount of allowance per day, to take care of our day to day expenses. Some might go on single trips in a financial year, some on multiple. In both these cases we would need to know what is the total time spent outside India.

Out of the allowance received, some amount is saved. Is this amount taxable?

As per the IT Act any unspent amount shall be taxable.

Since the company has sent the employee on foreign assignment, his/her salary is TAXABLE in India.

However in 2005 the income tax department came with a circular with respect to Fringe Benefit Tax (FBT) and allowance received.

As per the circular the employee is not liable to pay income-tax on any amount saved from the allowance received. If your company deducts the FBT on those sums of money paid to you as allowance, the same is not taxable in your hand under I T Act.

Now that we are clear if it is taxable or not, the question is how we convert the foreign currency into Indian Rupees. Always use the official route, since its legal and not taxable. This way you could also invest the money. You have gone through a lot of sacrifices to save the money, now that you have saved it, would you like to just spend?

The main reason we talk about using the official route is, you do not just spend the money.

Where do you invest? There are many choices; lets have a look as some of our options.

Conventional: Bank Fixed deposits, NSC’s, Company Fixed Deposits, PPF, Insurance
These are safe returns and capital is guaranteed. The downside is the taxable part.

Share / Stock Market / Commodities / Futures and options:
You need to be really careful. Don’t go by hearsay, do your own study before you invest.

Mutual Funds: Equity / Debt / Sector specific / Income.
Though risky, the risk is somewhat less compared to the option above.

Real Estate:
This is quite safe. But the amount required is quite high.

Business: Is this everyone’s cup of tea?