Reader's corner: How you can move equity from MFs to a debt fund

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I will retire in four years. I have accumulated a corpus of around Rs 5.5 million in equity mutual funds which I will move to debt fund slowly. I want to set up a systematic withdrawal plan (SWP) to meet my cash flow requirements post-retirement. Please suggest how I should do it. I also want to know the taxation of SWP.

Assuming that you have moved your investment to a debt fund and plan your regular withdrawals from it, to use the SWP route in a tax-efficient manner, you need to let your investments age for at least three years in the debt fund. Considering that you retire in four years, your portfolio value would have appreciated to around Rs 7.1 million based on the assumption that your debt fund generated a 6 per cent annual return. Post-retirement, if you were to do a monthly SWP of Rs 50,000 for a 10-year period, at the end of the SWP tenure you would still end up with a portfolio value of roughly Rs 4.6 million, considering the same 6 per cent annual return. On taxation, only the capital gains on the withdrawal component after factoring the indexation benefit is subject to tax. Investments made in debt funds for three years and above qualify for long-term capital gains and are taxed at 20 per cent post indexation benefit.

With so many international funds available, how do I choose where to invest? What are the benefits of investing in them? Are they suitable for small investors?

By investing in an international fund, you position yourself to potentially benefit from the growth in international markets. Further, two of the major benefits of investing in an international fund are – it offers geographical diversification and safeguards your investments against possible local currency depreciation. In the past one year or so, international funds have generated healthy returns partly owing to the weakening rupee. If you are a first-time investor, you may consider investing in a global equity fund or a US equity fund.

There has been recent news of mutual funds privately funding promoters of companies. As an investor, how do I know what my debt fund is up to? I checked the portfolio of my debt fund, and there are some companies that I have never heard of. If I don’t want to take credit risk and minimum duration risk, which category of mutual funds are the best?

If you want to completely avoid credit risk and maintain a minimum duration, you should consider investing in overnight funds, as these funds primarily invest in TREP or Triparty Repo (erstwhile known as collateralised borrowing and lending obligation or CBLO) which matures on the next day. If you intend to invest for up to six-month duration, you can also consider investing in funds from the liquid and ultra-short duration categories. If you want slightly higher returns and are comfortable with longer durations then you can consider investing in gilt funds. These funds primarily invest in sovereign papers such as medium and long-term government securities, which are generally considered safe. There is no credit risk in them.

Can you help me understand how the process of loan against mutual fund works?

Loan against mutual fund is similar to an overdraft facility offered by banks and non-banking financial companies (NBFCs), wherein your mutual fund units are held as collateral. Most of these financial institutions offer a seamless online facility to avail such loans. The processing fee and interest rates may vary from one institution to another. During the loan tenure, you cannot perform any sort of transaction in the mutual units that have been provided as security to the lender.