Need regular tax efficient cash flows from your investments – Read on

Many of us especially the retired, seek, regular income from the savings one has accumulated over the years of hard work. Even if not retired, but working or earning decent income, it is always a regular cash flow which keeps your kitty growing and also increasing your confidence levels
One of the known and easy ways of doing this is to invest in a Fixed deposit and opt for monthly payout of interest. The problem with this is that
a.  The interest received is taxable
b. In a reducing investment cycle, the cash flow reduces on reinvestment as the interests earned keep coming down
c. There is a lag in case the interest rate picks up, as the benefit of this also delayed.
d. While there is safety of the investments, the invested amount does not grow.
There are options for other investments which can give not only regular cash flows, the cash flows can be tax efficient and can appreciate also marginally
I have considered three options for investments, which when invested can provide the three above mentioned objectives.
1. Investing in MIP mutual funds, which invest 70 to 80% in debt and balance in equity. The equity portion gives appreciation to the capital.
2. Investing in Balanced funds which invest 65% in equity and 35% in debt and these are volatile in the short term but will help give cash flow and appreciation of capital in the long run.
3. Mixing 50% in option 1 and 2 mentioned can also be considered.
The enclosed excel sheet gives the details of working and the summary is given below.
Assumptions while calculating the cash flow.
a. An investment amount of Rs 10 lakhs is assumed.
A ten year time frame has been assumed from the date of investment on 1st April 2007 till October 1, 2016.
b. The year has been chosen as 2007 as there was big market crash in 2008 and hence it would affect the investments, unlike FD.
c. The reason for choosing this that, we may encounter similar situations in future also.
d.  For academic exercise, have chosen, Birla MIP wealth Fund and Birla Balanced 95 fund.  However a combination of other funds can also be used for investing. This is for understanding the concept.
e. A cash flow of 1 % per month ie 10 k per month and 2% ie 20 k per month are worked out. A person desirous of having higher cash flows can understand that.
f. In order to have a best utilisation and tax efficiency of the cash flows, it is assumed that the first cash flow will start after completion of 3 years,
g. Income tax rates and indexation benefits  are assumed as per current IT rules and similarly long term capital gains on equities are as of today. These are subject to change.
h. The interest rate on FD has been reducing over the years. The rates have been assumed as below
first three year 13.2%
Next three years till 2013 as 11.6% and after 2013
it is assumed as 9%
At the current rates, it would be around 8.1% per annum.
i. This is just a concept and illustration and one should understand their risk profile and risk capacity before arriving at any decisions.
j. Investing in balanced fund the entire corpus gives you good returns over the long term. But one can consider a combination of MIP and balanced.
k. You can do contact me for any clarification on this subject.
Varadharajan VS

Tax Free Bonds – An Alternative to FD – Who should buy this?


In the next few months, it is going to rain Tax Free bonds to the tune of 40000 crores.   Know what is in it for you–

a.  What are tax free bonds?

Tax free bonds are debt instruments issues by Public Sector Enterprises , who are authorised to issue bonds to customers to raise capital for their expenses / working capital?

b. What is the duration of these bonds?

These come with duration of 10, 15 and 20 years.  That is if you buy a bond with a maturity of 20 years, you will get your capital after 20 years.

c. What is the rate of interest?

These come with interest rates as desired by the companies and  it is expected to be in the range of 7.25 to 7.35% per annum.

d. What is the credit risk? or risk to the capital?

These are bonds issued by public sector enterprises and have crisil rating of AAA which means they are very stable. These are backed by the government of  India as the Government is the majority stake holder in these companies.

e. Who can apply?

Any resident individual or HUF and corporates can apply.

f. What is the minimum amount?

The minimum amount would be Rs 5000. Normally these bond come with a face value of RS 1000 each and this can vary based on the issue.

g This should be bought in physical form or Demat form?

One has the option to buy in any form they desire to buy. However there is a difference one should know.

In physical form, an investor will continue to get the interest annually. However this cannot be sold in between. Capital will be returned on Maturity based on duration.

h.  Can I surrender this or sell this before Maturity?

This cannot be surrendered before maturity. However if one wants to sell before maturity, this can be sold in the BSE (Bombay Stock Exchange) trading platform, through an authorised broker.

IN order to do this, you must have a demat account.

i. How will the interest be paid?

The interest will be paid to the bank account opted by the customer in the application through electronic transfer.

j. Is this a good time to buy these bonds? Who should buy these bonds.

This is an ideal investment vehicle for investors, who want safety and assured returns without loss of capital.  Many of these investors invest in FDs in bank.

With the interest rate coming down as the RBI is reducing the interest rates, there is a reinvestment risk.

Reinvestment risk, is that when you reinvest the FDs you do not get the same interest as the previous period but lower than that. This is called reinvestment risk

The tax free bonds have the same rate of interest and hence it has no capital risk or reinvestment risk.

Especially retired persons, who seek, regular cash flows with least risk can opt for this.

Also others as a diversification in asset allocation can have this in their portfolio.

k. What will be the rate of these bonds if I were to sell this in between maturity say two or three years later?

The bonds will be traded on the stock exchange and the bond prices will vary from the face value. Depending upon the interest rate outlook, the bond prices may be higher or lower.

For example, the bonds issued in 2013 are trading at a premium of 20% ie. a 1000 face value bond is now available at 1200. So an investor who has bought this two years back, would have got 2×8.5% plus 20% if he sells it today.

l. Is there capital gains tax, if sold later?

In the example given above, on 20% a 10% capital gains is charges if sold after one year. ie you pay 2% tax. However if you sell before one year, the entire gains is added to your income and taxed as per your income slab.

g. What is the scope for appreciation or capital gains in the short term?

As long as the interest rates are downward biased the bond prices will be higher. with the next one to two years, we are expecting more rate cuts there is a high probability of capital gains.

However if the interest rates were to raise, it is possible that the bond prices may be sold even below face value of RS 1000.


It is recommended for the customer cited above that this could be a good option and a very good alternative to FD at the least for the next 2 to 3 years.

For details do contact me


Worried about the falling interest rate scenario? What do you do with your FDs


Almost every one has a fixed deposit. Very rare to find a family with a reasonable income above 3to 4lacs  not to have a FD.  This the first savings / investment, any one would think of. Now that RBI is reducing interest rates and this has a bearing on our FDs which are maturing in the near future.
What has changed recently.
a. The interest rates have come down by 50 basis points in the last three months ie 0.5%
b. With the changes in RBI rules, companies have stopped accepting fixed deposits.
c. Only companies under NBFC category ( Non banking financial companies) can accept fixed deposits.  These are finance companies like sundaram finance, Bajaj / Mahindra finance, Shriram transport to name a few.
d. Even Jewellery firms have trimmed their chit schemes and hence there is little option for investors.
So Is there a better option for an investor who is normally renews FDs year after year.
While there are different types of risk, the one associated with the Fixed deposits are
1. capital risk –  It is perceived that the capital is safe if invested in Banks
2. Reinvestment risk.  The risk of your renewed deposits earning lower returns when the interest rates come down.
That is precisely the scenario now.
Above all ,if you are an IT assessee , you pay income tax.
IN case you get 9% interest and you are in the higher bracket of 30%, your post tax returns will be 6.3%
The irony is that even if you  have a cumulative deposit and not withdrawing interest, you are liable to pay the tax on the interest you accumulate in a financial year.
I share with you an option, especially for investors, who normally keep investments in Fixed deposits and renew year after year. Let us assume the investor, at the least renews for 3 to 5 years.
One can consider investing in debt fund, and this fund is known as Monthly Income Plan or MIP in short.
I have analysed a fund, by name Franklin INdia MIP for the last 9 years and the returns of these funds are tabulated below for your understanding. The returns vary depending on the performance of the market and from the table below you will see no year, more than one year the fund has given a negative return.
Please note that the investments are invested 80% in debt instruments and 20% in equity.  But as one can see in the table, the returns are positive an fluctuate with market  The longer the duration, the fluctuations are normalised  to get a better post tax returns.
If you had renewed for 9 years, and had invested 1 lac, you would have got 2.16 lacs with an annual return of 12.99% post tax, which is almost double the fixed deposit return.
Now the most interesting aspect is that the tax you would have paid on the interest you earned of 1.16 lacs is hardly 3 k and that too after 9 years.
This is because indexation benefits are available.
So if you are the one or any one known to you is reinvesting in FDs and worried about the falling interest rate scenario, you can consider this option or similar options.
year 1 2 3 4 5 6 7 8 9 10
2015 43.255
2014 7.833 35.422
2013 3.062 10.895 32.36
2012 2.922 5.984 13.817 29.438
2011 1.982 4.904 7.966 15.799 27.456
2010 0.791 2.773 5.695 8.757 16.59 26.665
2009 4.536 5.327 7.309 10.231 13.293 21.126 22.129
2008 -0.937 3.599 4.39 6.372 9.294 12.356 20.189 23.066
2007 2.608 1.671 6.207 6.998 8.98 11.902 14.964 22.797 20.458
2006 0.49 3.098 2.161 6.697 7.488 9.47 12.392 15.454 23.287 19.968
2015 43.255
2014 22.11% 35.422
2013 9.46% 33.67% 32.36
2012 9.93% 20.33% 46.94% 29.438
2011 7.22% 17.86% 29.01% 57.54% 27.456
2010 2.97% 10.40% 21.36% 32.84% 62.22% 26.665
2009 20.50% 24.07% 33.03% 46.23% 60.07% 95.47% 22.129
2008 -4.06% 15.60% 19.03% 27.63% 40.29% 53.57% 87.53% 23.066
2007 12.75% 8.17% 30.34% 34.21% 43.89% 58.18% 73.14% 111.43% 20.458
2006 2.45% 15.51% 10.82% 33.54% 37.50% 47.43% 62.06% 77.39% 116.62% 19.968
INFLATION INDEX 519 551 582 632 711 785 852 939 1024
9 years 5 years 3
min 37.5% 10.82
max 62.2% 46.94
amount invested in 2006 100000
cost of inflation index 1.973025048
investment cost 197302.5048
fund value today 216621.5946
profit 19319.08973
tax @ 20% 3863.817947
post tax return 112757.7766
annual absolute return 12.50%
Please do contact me for any further clarifications are interest.

Are you investing in Fixed Deposits and renewing every year? There is an alternative and tax efficient too.

. Are you the one who is looking for safe havens and not the ones to take risk and lose capital.

The first option that comes to your mind is FD. There not so good news for investors in FD.

The Biggest PSU Bank SBI has reduced the interest rates in FDs recently and this has been followed by banks such as Punjab National Bank and others are following soon.

Why this is happening?

  • RBI has redefined liquidity and banks are now borrowing through term repo rates and the interest on this  is coming down.
  • The credit growth is not taking off. Companies are borrowing outside the banking system through commercial papers which are cheaper.
  • RBI is expected to reduce interest rates as the inflation is softening and this reduction may take place early 2015.
  • There is reinvestment risk, which means when you reinvest the FD or renew the FD, you are likely to get interest lower than what you are getting currently.

If you are the one who is renewing the FDs every year and staying invested in FDs at least for a period of 3 years, read on.

You are likely to get 6- 26% extra tax free return over FD returns.  See the summary table below  

There are options available which protect capital and can give you better tax efficient returns,


The market ie the sensex is at around 26 k and going by the valuation it is around 20 times PE and is much lower than the high valuations we had in 2007.

The prospects for the markets to go by in valuations are high due to the following reasons.

  1. The currently the earning of the sensex companies are at  1585 and is expected to grow at 15% CAGR and is projected at 1800 for FY 17.
  2. This being the case, at current valuations, market could be at least 20% higher and when the valuations catch up, we could see the market at higher value
  3. Also the inflation has peaked and is showing signs of slowing down.
  4. The GDP is projected to improve
  5. With the fiscal consolidation taking place, the interest rates are likely to come down.
  6. This will do good for debt funds, which has moderate duration which can benefit out of the lower yield curve.

Therefore considering the time frame and the requirement,

  1. The lumpsum can be invested in Debt funds, Like dual advantage funds, MIPs etc for which a minimum investment period of 3 years is recommended.
  2. This period is required a. to get indexation benefit and get better tax efficient return b. There is no exit load applicable beyond the 3 year period.
  3. These vehicles invest in both, debt and equity, debt being 75-80% and equity component being 20-25%.
  4. By doing this, generally capital is protected and there is a probability of getting higher returns.
  5. With the market outlook looking positive and debt market expected to do well with anticipated interest rate reduction,  the probability of getting higher returns are quite high.

I give below the year on year return if one had invested in reliane MIP, a debt fund.

Year of investment                         1 yr return           2 yr                         3 yr                         4 yr                              5 fyr

Oct 2009                                               11,615%               12,8%                    25.73                     41,54                 57.98

Oct 2010                                                1.06                     12.65                     19.22                     33.05

Oct 2011                                               2.2                        17.96                     40.55

Oct 2012                                               4.8                          25.64

Oct 2013                                               19

As you will see the return vary for a one year period but is farily stable for a 3 yearperiod and no capital loss has happen

The 5 years return on Rs 10000,  if invested in 2009 is 15,798 (57.98%) and . Using the indexation, which is adjusting the cost of purchase, 161.24 and hene no tax is applicable. If you had invested in FD at 9% interest, you would got, 13,150.

Consider three year return.s

2009 – The amount of Rs 10000 becomes, 12,573 and the cost using indexation is 12,216 and you pay tax on Rs 357 @ 20% . which is Rs 72. Total tax free return is 12,500. Compare this with 11,890

2010 –  11,920 Vs 11890

2011 –  14,055 is the return and cost is 11900 and you pay tax of 430 and net return is 13,625.


tax free return
3yr 4 yr 5 yr
2009 12,501 11,890 6.11 14,154 12,520 16.34 15,798 13,150 26.48
2010 11,920 11,890 0.3 13,305 12,520 7.85
2011 13,625 11,890 17.35


If you are renewing FDs year on year, you can consider these types of fund, which for a period of more than three years can offer capital protection and can offer good return in comparison to FDs in the long run.

Please do contact me for choosing the right vehicle for investment.


Thinking of investing in FD – Pause – read this


If you have funds and planning to park in FD.  Read below.

FD in banks give a return currently around 8.5% to 9% for a one year maturity and you may get 0.25 % to 0.5% in case if it is invested in a senior citizen name.

Assuming you are a tax payer in the 30% bracket, and assuming the int is 9.5% , you still get a return of 6.65% post tax.

Compare this with debt funds.  You can get a double digit return in one year and most importantly the taxation is different if it is more than one year ie one year and one day, you pay only 10% tax as capital gains and hence if you get a return of 10% your tax free return will be 8.9% ie  you get 30% more tax free returns.

These are invested in safe returns and hence safety is not an issue.

One of the members had done this and the investment has grown to 11.4% (annualised) in 90 days

In case you have any doubts, pick up the phone and call me.

Thanks & Regards

v s varadharajan