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I have invested in UTI MIS: should I redeem

I am an NRI now in Qatar. I invested 31 lacs in UTI MIS advantage fund in the hope of getting 10% returns after a 1 year period. The market is bad and the FV is minus now and I stopped investing. Should I wait for a while to start SWP or do I redeem all funds and put in Bank FD @7.9% per year and get a steady income?

Feb 18, 2016 by George Mathews, Kollam  |   Mutual Fund

Your decision will depend on your own financial needs and risk tolerance level. If you want assured returns then you should go for bank fixed deposits and earn a steady income from your investment over the term of the fixed deposit. However, you are probably aware that bank will deduct 10% tax at source on your fixed deposit interest. You may likely have to pay additional taxes based on your own income tax slab. Interest from bank fixed deposits are added to your overall income and are taxed as such. Therefore, depending on your tax rate your actual post tax annual returns will be anywhere between 5.5 – 7.1%.

The past one year has been a very challenging period for capital markets, both equity market and the debt market because of the global macro-economic concerns. Equity market in India has declined by over 20% in the last 12 months or so. Since, UTI MIS Advantage Fund has around 25% exposure to equities, it is understandable that the fall in equities had an adverse impact on your investment. Further, the bond market in India has also faced challenging conditions especially over the last 4 – 5 months (please see our article, What should debt mutual fund investors do in 2016).

If you follow our blog in Advisorkhoj, we have stated a number of times that, investors should have a long investment horizon when investing in mutual fund monthly income plans like UTI MIS Advantage Fund. There are four reasons why a long investment horizon for these funds is beneficial for investors.

  1. Over a sufficiently long investment horizon the effect of volatility on your investment smoothens out.

  2. A long investment horizon enables you to take the advantage of an entire interest rate cycle, which includes periods of rising bond yields as well as declining bond yields.

  3. While equity markets are inherently volatile, the long term India Growth Story is intact as per most market experts. A long investment horizon will help equity as an asset class to benefit from the long term secular uptrend, short term volatility notwithstanding.

  4. Since Mutual Fund monthly income plans are treated as debt funds from a capital gains tax perspective, you can take advantage of lower long term capital gains tax by remaining invested for a period for more than three years. For an investment holding period of more than three years, capital gains from debt funds are taxed at 20% after allowing for indexation benefits. Indexation benefit lowers capital gains tax by a substantial amount.

UTI MIS Advantage Fund is one of the best Mutual Fund monthly income plans with a strong long term track record (please see our article, UTI MIS Advantage Fund: One of the best Mutual Fund MIPs for conservative investors). Over a 3 to 5 year horizon, UTI MIS Advantage Fund has given 9 – 10% compounded annual returns. If the macros of our economy (e.g. low fiscal deficit, inflation, foreign exchange rate, interest rate etc) improve, along with corporate earnings and most importantly global sentiments, there is every reason to believe that the fund can continue deliver strong returns in the long term. That said, the current market conditions continue to be challenging and will remain volatile in the short term. However, if you are patient and wait for markets to stabilize a bit before starting your SWP, then you will get much better NAVs for your units of UTI MIS Advantage Fund. If you get better NAVs for your units, then you will be redeeming lesser number of units in your Systematic Withdrawal Plan to meet your income needs. When you redeem less units for your SWP, a larger number of units will remain invested in the fund and earn you higher returns in the future through the power of compounding. Further, the longer you wait, the lower will be the tax outflow over your investment horizon. How long you can wait is totally dependent on your financial needs.

You should give the various factors, discussed above, your thoughtful consideration and f required, consult with your financial advisor, to take a decision that is in your best interest.

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