A Mutual Debt Wish

Its a paradox. On the one hand are the echelons of the mutual fund industry, an extremely optimistic bunch, for they believe the industry is set to stage a comeback. And on the other is the inv-estor, still pessimistic, still wary of investing in mutual funds.

You dont have to go far to find the root of this cynicism. After all, you invested your money with the Morgan Stanleys, Taurus Newshares and the Canstars of yesterday, only to see the value of your hard-earned pennies erode very fast in the 1994 boom-bust. Why would you trust a mutual fund again?

 

But there is perhaps one key element you overlook in your bitterness about mutual funds. All those funds you invested in were focused on equity. Yes, equity can give you the highest returns (depending on the fund managers skills, of course), but it is also the most vulnerable and volatile instrument in the market. And to really gain from equities, you shouldnt be fishing for quick gains as that exposes you to the vagaries of market behaviour, which in the long term, even out.

So if you look closely at the MF market again, you will realise that it is only the equity-focused funds that have slumped. Other mutual fund schemes that concentrated on debt, have been performing surprisingly well. You have before you the cases of JM Liquid and Birla Income.

The advantage of debt-based schemes is that they can invest in privately placed bonds or debt instruments of highly rated companies. And that, at good rates because corporates are eager to settle their finances to get projects off the ground.

ow cosider some of the debt-based MFs i the market. Birla Mutual Fud ad Kothari Pioeer Mutual Fud have come out with schemes fully dedicated to debt ad moey market instruments (although Kothari Pioneer has left an opening for equity investment upto a maximum of 20 per cent). Their sch-emes have been christened Birla Cash Plus and Kothari Pioneer Income Builder Account. But they do not lend themselves readily to comparison. So, lets take a look at them individually.

Birla Income Plus: This is an open-ended debt-oriented fund, requiring a minimum investment of Rs 25,000, probably the highest demanded by any scheme in the country. The scheme does not indicate the returns that might accrue to the investor, but it broadly seeks to provide moderate returns and high liquidity

The plan doesnt offer a regular income with dividend warrants. It is more in the nature of an account where the earnings accumulate. Of course, you have the option of encashing it (a minimum of Rs 10,700). You can also withdraw the whole or a part of your holdings in the scheme any time. Within three days of your posting a request for reimbursement, your cheque is in the mail!

However, the asset management company reserves the right to declare a dividend. This does create uncertainties as it could affect all your financial planning.

The scheme doesnt have redemption loads for the initial investors, but those entering after the closure of the initial offer will be charged a three per cent load on the prevailing NAV at entry. Latecomers will also be charged a 3 per cent exit load on redemption.

The scheme is suitable for high net worth individuals, entrepreneurs and firms with regular cash flows. It can even be considered a temporary investment option as it makes good sense to invest part of your cash surplus here rather than put it in your current account. And since the scheme is open-ended, with the option of putting in more or withdrawing money, you could virtually operate it as a bank account with higher returns.

Kothari Pioneer Income Builder Account: This too is an open-ended income fund, but offering both a dividend plan for regular income and a growth plan for capital appreciation. Under the dividend plan, you can choose to reinvest the dividend or receive it as a payout. It is ideally suited for those who are looking for a regular flow of income. Subscribers to this option can avail of tax concession under Section 80L whereby you can claim a deduction upto Rs 15,000 on income from MFs and other specified securities. Out of this Rs 15,000 limit, Rs 3,000 is exclusively reserved for income from dividends from MFs and company shares.

But if you have already availed of the Section 80L deductions and dont really need a regular flow of income, then you should opt for the growth option. Here, capital appreciation is reflected in the NAV. You can benefit from the concessional tax rates of 20 per cent on long term capital gains and also from indexation (adjusting the cost of acquisition for inflation) under Section 112.

You can also avail of the option of switching from growth to the dividend scheme. All you have to do is send in your request. Whats more, it is a no load fund at all times. That, combined with the overnight redemption facility in metros, means that this is the mutual fund that comes closest to a bank savings account. All you require is a minimum balance of Rs 2,000. And returns are guaranteed to be higher than in a savings bank account.

Tax Breaks: Under Section 112 of the IT Act, 1961, long term capital gains in terms of units held for more than 12 months are taxed at a concessional rate of 20 per cent. Capital gains realised from sale of property, shares or other assets, when invested in the scheme, are free from tax under Sections 54EA/EB.

Open-ended debt-oriented income fund 100 per cent debt and money market fund for returns with liquidity

Minimum subscription amount Rs 25,000, with additional investments in multiples of Rs 5,000 High liquidity: redemption cheques sent within 3 days of request

NAV to begin at Rs 10 per unit. Launch expenses borne by the asset management company Initial offer closes June 16, 1997 Tax breaks under sections 112 and 54EA/EB of the IT Act

An open-ended income fund Choice of dividend plan for regular income and growth plan for capital appreciation.

Indicative returns of 14 per cent No load fund at all times Overnight redemption facility upto Rs 1 lakh in the metropolitan cities (48 hours elsewhere)

No tax deduction at source on redemptions. Tax breaks under Section 80L and 54EA/EB. Initial offer closes June 23, 1997 Minimum subscription of Rs 2,000 and additional investment can be made in multiples of Rs 1,000