Balanced Mutual Funds are hybrid equity oriented mutual fund schemes. These funds usually invest 65 – 75% of their portfolio in equity securities and the remaining in debt or money market instruments. The hybrid portfolio moderates the fund volatility to a certain degree while enabling potential wealth creation in the long term. Since at least 65 – 75 % of the portfolio is invested in equities or equity related instruments, balanced funds are subject to equity taxation.
Long term capital gains, for investment period of more than 1 year, is tax exempt. Short term capital gains applicable for investments of less than 1 year are taxed at 15%. Dividends from balanced fund schemes are also tax free.
Readers who are interested to learn more about Balanced Funds, I suggest them to read these articles posted on our website –
Can mutual fund balanced fund be your best bet
Investing in balanced funds versus a portfolio of equity and debt funds
Why balanced funds may be the best investments for new mutual fund investors
What is Systematic Withdrawal Plan (SWP) in Mutual Funds
Systematic Withdrawal Plan or SWP, as popularly known, is a service offered by Mutual Funds which provides investors withdrawal of a specific amount of payout at a pre determined time frequency, like weekly, fortnightly, monthly, quarterly, half-yearly or annually.
Unfortunately, this is a much underestimated investment strategy in India. If understood properly, this could become the most effective and tax efficient way to earn regular returns from Mutual funds. Through a series of our blog post on SWP, we will try educate the investors about SWP, how it works and the tax benefits etc. by showing some examples of top performing Balanced Funds.
How SWP worked in case of ICICI Prudential Balanced Fund - Growth
If you had invested
र 10 Lacs in the NFO of ICICI Prudential Balanced Fund on November 3, 1999 and withdrawn र 8,000 per month from November 3, 2000, then the current value of your investment would have been र 34.65 Lakhs even after withdrawing र15.12 Lakhs!
We came to this conclusion by presuming that the lumpsum investment of
र 10.00 Lakhs was made on the Scheme inception date i.e. November 3, 1999. We also presumed that the monthly SWP withdrawal of र 8,000 was started after one year (starting date November 3, 2000) and thereafter on the 3rd date of every month so that each and every SWP amount in the hands of the investor is tax free.
Please look at the image below to understand how we have selected the different options in the research tool to get this result. You can also explore this SWP Research tool to explore SWP return of any fund you like.
Source: Advisorkhoj SWP Calculator (Data as on 15/7/2016)
SWP (Systematic Withdrawal Plan) results
From the above chart you can see that the investor would have withdrawn a total of
र 15.12 Lakhs through 189 instalments of monthly SWP of र 8,000 each, thus, he would have got a tax free return of 9.6% every year. Even after withdrawing a tax free amount of र 15.12 Lakhs, the current value of his investment stands at र 34.65 Lakhs!
You may Download the cash flow in excel and check
But how SWP can take care of inflation
Inflation is a very vital point when you are planning your investments. In fact, two things are very important in any investment planning – Post tax return and inflation adjusted return. Therefore, in this study, we will analyse what happens when we increase the SWP amount by 5% (presuming average inflation rate of 5%) every year?
Source: Advisorkhoj SWP Calculator with Annual increase (Data as on 15/7/2016)
From the above image, you can see that the investor would have withdrawn a total of
र 20.70 Lakhs through 189 instalments of monthly SWP of Rs. 8,000 per month in the first year and ending with र 14,000 per month in the last year. Therefore, he would have got a tax free return of 9.6% in first year which gradually increased every year and in the last year it was 16.80%. Even after withdrawing a tax free amount of र 20.70 Lacs, the current value of his investment stands at र 21.18 Lakhs! The fund gave an annualised (IRR) 13.25% return.
Please download the cash flow in excel and check how it worked?
Let us now see how the SWP amount increased over a period of time, the increasing withdrawal % on the lumpsum amount and how the value of net investments changed annually post these systematic withdrawals.
You will notice how we have increased the SWP amount annually by 5% on the initial investment. You will also notice that during the first 3 years, the net investment value dropped to less than the initial investment amount i.e.
र 10.00 Lacs. You also must have noticed that barring these 3 years, the remaining 13 years the net investment never went down to less than the initial investment of र 10.00 Lacs. It proves that if you remain invested over long period in balanced funds then the trailing returns should be positive.
Now let us see the annual returns of ICICI Prudential Balanced Fund against VR hybrid Equity Oriented index
You will notice that the fund has beaten the VR-Hybrid Equity Index in most of the years excepting 2000, 2007 and 2008 when the markets passed through the most volatile times.
About ICICI Prudential Balanced Fund
ICICI Prudential Balanced Fund is a hybrid equity oriented fund, popularly known as balanced funds. Launched in November 1999, it is another popular fund in the Balanced Fund category from India’s No.1 AMC, ICICI Prudential Mutual Fund having AUM of
र 3,018 Crores (As on June 30, 2016). It is one of the best performing Balanced Funds in the industry with a long track record of around 17 years. Sankaran Naren, the veteran Fund Manager, manages this fund along with Manish Banthia and Yogesh Bhatt.
The fund has got excellent rating from valueresearch i.e. 4 Star. CRISIL Rank for this fund is 3, according to their mutual fund ranking for the quarter ending Mar 31, 2016. The top 5 stocks that the fund is invested in, are – Power Grid, Coal India, Cipla, Reliance and Bharti Airtel Ltd. The 3 top sectors are Energy, Financial and Healthcare.
We reviewed this fund sometime back which you might like to read superb performance in the last 5 years
Lumpsum returns of ICICI Prudential Balanced Fund
So far we discussed the SWP returns of ICICI Prudential Balanced Fund and found how amazing the results were. Let us now examine the lumpsum returns of this fund. Had you invested
र 10 Lacs in the NFO of this fund on November 3, 1999 the current fund value would have been a whopping र 91.12 Lakhs, a decent CAGR of 14.63% since inception.
Most importantly, ICICI Prudential Balanced Fund would have also comfortably beaten the returns of fixed deposits, Gold and Silver. Please see the chart below
Source: Mutual Fund Comparison Chart with Asset Classes
An amount of
र 10.00 Lakhs invested at the same time in Gold, Silver and Fixed Deposit would have got you only र 67.73 Lakhs, 46.73 Lakhs and र 33.42 Lakhs respectively compared to र 91.12 Lakhs given by ICICI Prudential Balanced Fund.
SIP Returns of ICICI Prudential Balanced Fund
The SIP returns of ICICI Prudential Balanced Fund have also been amazing! If you had started a monthly SIP of
र 5,000 on November 3, 1999, then you would have accumulated a corpus of र 45.77 Lacs as on today (based on NAV of 15/07/2016) whereas you had invested only र 10.50 Lacs through 201 instalments of र 5,000 each. During this period the fund has given a XIRR return of 16.28% which is one of the best amongst the peer group of schemes. Check our SIP Return Calculator
ICICI Prudential Balanced Fund has given amazing SWP returns since inception and may be a good choice for investors looking for regular income from their lumpsum investments. However, investors should note that past performance of mutual funds are no guarantees for future returns. Mutual fund investments are subject to market risk and therefore investors must consult their financial advisors and check if investment in ICICI Prudential Balanced Fund is suited for their investment needs based on their risk profile.
We reviewed this fund sometime back which you might like to read an ideal balanced fund for investors with moderate risk appetite
Readers interested in knowing more about SWP, may read the following contents –
Mutual Funds are ideal investment option for retirement planning
Mutual Fund systematic withdrawal plans are smart option for income needs
Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.