Where to invest for a regular income

Monthly Income Plans are mutual funds that seek to give regular dividends to investors.

Though returns are not guaranteed, they are an ideal choice for investors with a moderate risk appetite seeking some form of income.

Investors who do not want to invest in diversified equity funds or even balanced funds (funds that invest in both equity and debt) can consider making investments in MIPs.

These funds invest more in debt (fixed return investments) than in equity. Hence they are safer than equity funds and balanced funds. Moreoever, the average one year return of 9.52% is higher than what you will get on a conventional fixed deposit.

Here are the best MIPs.

Birla MIP

Birla MIP looks a bit unexciting right now, but its conservative approach, ability to generate returns during the good as well as the bad times and low volatility should appeal to cautious investors.

Of course, its recent performance – which is lower than that of its average peers – looks discouraging but investors should keep in mind that Birla MIP is more of a wealth protector and not an aggressive wealth creator.

Unlike Birla MIP, most other MIPs who have outperformed the average have a mandate to invest more in equities and have generated returns by cashing in on this bull run. This has resulted in higher returns and higher volatility.

Birla MIP started off as an ultra-conservative fund in November 2000. Though it had a mandate to invest up to 15% of its corpus in equities, it hardly crossed an average 5% in the first two years, and rightly so as equity markets were in trouble. Then, returns from debt were enough to make it one of the best MIPs.

The fund's portfolio underwent a makeover in 2003. The tide turned in favour of the stock market and the fund increased its exposure to equity. It hit a rough patch in 2004 as a result of rising interest rates.

Cautious investors should like its low volatility and decent returns.

DSPML Savings Plus Moderate

After a splendid start, this fund's endurance is being tested. It has underperformed in the last three successive quarters. However, a quality portfolio, low volatility and continuity of fund managers should comfort investors.

The fund stressed on safety and had a mandate of up to 20% of total investments in equity. However, this is restricted to the top 100 companies by market capitalisation. As a result, this fund is less risky and less volatile than some of its peers.

This has also resulted in lower performance since its peers have gained by investing in mid- and small-cap stocks.

This fund is great for those who prefer stability against flashy returns. Conservative investors should like this fund.

The only concern here is the expense ratio which has gone up in the last one year.

Franklin Templeton India MIP

While no MIP can or should be aggressive, this one takes aggression as far as it can reasonably be taken. This has paid off and the fund is the best performing funds in this category.

The fund has a mandate to invest up to 20% of its total portfolio in equity. In the last two years, the fund has allocated an average of 18.65% of total investments to equity. This has resulted in volatility and higher returns.

As a risk control measure, the fund has always maintained a concentration of large-caps. And it has invested in around 25–35 stocks in different sectors.

The fund has also done a good job in keeping expenses under control. The expense ratio, which used to remain 2% till last year, has dropped to 1.89% as on September 30, 2005.

HDFC MIP Long-term

Since launch in December 2003, this fund has had a ballistic start. But even as we say that, we must point out that the value of an MIP having such a beginning in the middle of a bull run is questionable.

It was the hottest MIP last year and is well on its way to repeating its performance this year. However, its high volatility might unnerve conservative investors. Investors with a long-term investment horizon would benefit from this fund's aggressive approach.

The fund's mandate to invest up to 25% of its portfolio in equity has proved to be a blessing to the fund manager. The bull run has given him the mandate to invest in stocks and the fund has almost always kept its equity allocation above 20%. In fact, in the last eight months, it has pushed its exposure to close to 25%. The fund manager has also invested in mid- and small-cap stocks.

While this has generated a great return, it has also resulted in volatility higher than that of its peers. Expenses are high as well and have increased in the last one year to 1.93%.

Prudential ICICI MIP

Even though it looks more aggressive now compared to its cautious past, this fund continues to be one of the best options for conservative investors.

Though the fund has a mandate to invest up to 15% of its portfolio in equity, it started off in October 2000 with an equity-free portfolio.

This resulted in an MIP which lacked any returns firepower but was perfect for the normal MIP investor whose priority was capital preservation.

Soon, this fund's low volatility and reasonable returns made it one of the more popular options in the category. It continues to enjoy that reputation till date.

In mid 2003, it increased exposure to equity. Since the start of 2005, it has invested nearly 14% of its assets in equity and this has included investments in mid- and small-cap stocks.

Though these changes have increased the volatility of the fund, its still remains one of the lowest in the category.

The fund has tried to minimise risk by keeping cash and diversifying by investing in a number of stocks. But, will it live up to its reputation of a capital preserver with this approach? Nonetheless, it is one of the better options in the MIP category.

How to save on tax

Do you have any dependents?

In your twenties, the best insurance to opt for is term insurance. It is the purest and simplest form of life insurance.

You pay the company a premium for a certain number of years. Should you die during this time, the beneficiary (person you name in the policy) gets the money.

Should you live, you lose the premiums paid and you get no money at all.

Let's say you are 25 years old and you take a term insurance policy for 20 years. The amount you get insured for is Rs 10 lakh (Rs 1 million).

If you outlive your policy, you get nothing.
If you do not outlive your policy, the person you nominate will get Rs 10 lakh.

In the first scenario, you pay; you get nothing; your beneficiary gets nothing.
In the second scenario, you pay; you get nothing; your beneficiary does.

Either way, you personally do not benefit.

That's the bad part about term insurance.

The good part about term insurance is that it is the cheapest life insurance available, so you pay the least amount of premiums. For the above policy, you should pay just around Rs 1,988 per annum. This is just an average, you could be paying more since each insurance company will set their own premiums.

If you have absolutely no dependent family (parents, spouse, children), then there is no need to opt for this policy. But, if you do, term insurance is a must. No other policy will offer you as much value for money as this one.

The premium you pay for this policy will be available for deduction under Section 80C.

Play safe, insure your health

A Mediclaim policy is a must because should you fall sick or meet with an accident, your medical bills could wipe out your savings.

As in term insurance, the premium rates will vary among the insurers and will also depend on your age. The older you are, the more hefty the premium.

For instance, Mediclaim policy from General Insurance Corporation has a fixed premium till 35 years and then it changes in 10-year slabs.

Let's say you take a Rs 1,00,000 medical insurance cover.

Age (years)	Annual Premium (Rs)
Till 35	1310
36 – 45	1425
46 – 55	2039
56 – 65	2322
66 – 70	2589
71 – 75	2784
76 – 80	3445

The premium you pay for your Mediclaim is eligible for tax benefits under Section 80D of the Income Tax Act, 1961. This is in addition to the Section 80C benefit of Rs 1,00,000.

This premium is deducted from your gross income. Let's say your gross annual income is Rs 5,00,000 and you pay a premium of Rs 5,000. Your gross will drop down to Rs 4,95,000 for tax calculations.

Even if you do have a medical cover provided by your employer, it makes sense to take out a cover for yourself. Read Why office Mediclaim is not sufficient to understand this better.

Have you thought of buying a home?

It is something you will have to eventually consider. And, you get great tax benefits on a home loan.

When you repay a home loan, you do so via an Equated Monthly Installment. This EMI is a combination of interest payment and principal repayment. Read What you must know before taking a loan to understand how EMIs work.

Principal payments upto Rs 1,00,000 on your home loan are eligible for deduction under Section 80C.

The interest you pay also gets a tax benefit. Under Section 24, the maximum amount of interest that can be deducted from your income is Rs 1,50,000. As a result, your taxable income decreases by that amount.

Let's say your salary income is Rs 3,50,000 and the interest payment on your home loan is Rs 1,60,000. Your taxable income will drop to Rs 2,00,000.

Taxable income = Rs 3,50,000 - Rs 1,50,000 (maximum limit for interest on home loan) = Rs 2,00,000

Summing it all up

Let's take an example to see how the tax is deducted.

Salary income: Rs 3,20,000
Home loan interest payment: Rs 1,20,000
Home loan principal repayment: Rs 80,000
ELSS investment: Rs 30,000
PPF: Rs 5,000
PF: Rs 32,000
Premium on Mediclaim policy: Rs 5,000

Salary (a)	320,000
Income from house property (b)*	-120,000
Gross total income (c) (c = a + b)	200,000
Less: Section 80 deductions
Section 80C deductions
Home loan principal repayment	80,000
ELSS investment	30,000
PPF	5,000
PF	32,000
Sub Total	1,47,000
Limit for Section 80C deduction (d)	1,00,000
Section 80D deduction (Mediclaim Premium) (e)	5,000
Taxable income (c - d - e)	95,000
Tax on taxable income	Nil

* The tax man views the home loan interest payment as negative income.

When doing your tax planning, look at it comprehensively. Take a look at your insurance needs, your investment needs and whether or not you are servicing a home loan.

If you do not have a home loan, you will have to increase your investment allocation. If you do have a home loan, then you can accordingly decide how much to invest in PPF and ELSS.

Try your best not to compromise on your insurance. Once you decide how much to insure yourself for, stick with it. Don't let your tax outgo determine that.

Where to invest to save tax

It's that time of the year when everyone starts thinking about taxes. Or rather, what to do to minimise them.

This time around, the tax payer has the going a little more easy. After all, Section 80C is certainly better than the now defunct Section 88.

Section 80C offers tremendous flexibility in determining where your money should go.

Basically, the list of investments that qualified under Section 88 also appear in the new Section 80C. The good news is that the internal caps put on the investments have been taken out and you get to decide how much to invest where. As long as it all falls within the Rs 1,00,000 limit.

Here we present the best investing options for those in their twenties.

Infrastructure bonds

This is a classic example of where you should NOT invest.

You need to wisely select those that will fit your profile.

Under Section 88, everyone was virtually forced to invest in these bonds. Under the overall cap of Rs 1,00,000, Rs 30,000 was exclusively reserved for these bonds. If you did not invest in the bonds, you lost out.

This is no longer the case. Investment in infrastructure bonds falls under the overall Section 80C limit of Rs 1,00,000 with no separate cap. So you have the choice of bypassing it for another investment. Please do so.

These bonds will offer a return of around 5.5% to 6% per annum with a lock-in period from three to seven years. The returns are poor and at this stage in your life, there is no need to even consider such an avenue.

Equity Linked Saving Schemes

This is an investment you MUST consider.

ELSS are diversified equity mutual funds with a tax benefit under Section 80C. Diversified equity mutual funds are those that invest in the shares of various companies of various sectors.

Since you are young, you have time on your side to ride the ups and downs of the stock market. Moreover, stocks should be part of your investments because not only do they add that extra zing to the portfolio, but they also give the best returns over the long term.

Initially, under Section 88, there was a cap of Rs 10,000 on the investments made in ELSS. You could not invest more than that in these funds. Under Section 80C, there is no cap on this investment. If you choose, you can invest right up to Rs 1,00,000 in this investment option.

Investments in ELSS have to stay locked in for a period of at least three years. And, the returns can be great.

In 2003, these tax planning funds gave an average return of 108.97% while the Sensex rose just 72.89% that year.

In 2004, the Sensex gained just 13.08% while tax planning funds gained a little over 30%.

As on December 26, 2005, the average five year returns are 28.80% and the three year returns are 57.08%.

The best tax saving funds are Franklin India Taxshield, HDFC Long Term Advantage Fund, HDFC Taxsaver, Magnum Taxgain and Prudential ICICI Tax Plan.

Public Provident Fund

PPF is a great long-term investment strategy.

Please do not confuse this with the EPF. Employers usually provide an Employee Provident Fund for their employees.

A percentage of the salary is deducted as Provident Fund and, generally, the employer contributes as much as the employee contributes into the fund.

Since this is automatically done, you don't need to worry about it. Your contribution to the provident fund is eligible for deduction under Section 80C.

The PPF is a government run fund where the entire contribution is voluntarily made by the individual himself.

The maximum that can be invested in a financial year (April 1 - March 31) is Rs 70,000. Here you will get a return of 8% per annum.

Your money will be locked for a period of 15 years. It may seem like a long time but will work to your benefit if you use it as a long-term retirement investment option.

Since the minimum that you have to put in every year is just Rs 500, it is easy to maintain this investment even over a long period of time.

This is one investment that offers total safety since it is backed by the government and the return of 8% is higher than what you will get from other fixed return instruments.

So if you are going to invest significant amounts in ELSS, which are inherently risky because they are equity, you could balance your investments by also investing in PPF.

That's not all

Besides ELSS and PPF (and the provident fund contribution which is done automatically), there are other options that you must look at to save tax. Though they are not investment options per se, they must form a part of your overall investment strategy.

Is it time to sell your shares?

If there is one question that is frequently asked by investors, it is this: Should I sell my mutual fund units and shares and make a profit or should I hold on?

On the one hand, you hear statements claiming that this bull run is going to last for at least a few years. On the other, you are warned to be careful because it has peaked.

So, what does one do?

The advice dished out on investing sounds great in theory. Buy low (when the prices of shares or mutual fund units hit rock bottom) and sell high (when they soar) is a surefire way to make money in the market.

But frankly, who has a clue as to when the stock market has touched rock bottom or has peaked?

The dilemma of when to buy and sell lies in the uncertainty as to whether the stock market will fall or not, and if yes, when? No one can have such foresight.

Even if someone confidently looks you in the eye and swears that the Sensex is going to soar to even greater heights, there is no way you can know that for a fact.

Offload slowly

Don't begin by selling all your units. Sell portions of it.

Say you have 100 units of a fund. And if you sell now you are sure to make a profit. But, you want to wait for a few more months because you want to make an even better profit if the Sensex creeps upwards.

Sell 50 units now. In this way you hedge your bets. If the Sensex does fall and the value of units falls, you would have made a neat profit by selling a part of your holdings.

If the Sensex does rise, you can sell the other units at a higher level.

I have a friend who decides when to sell at the time of buying his units or shares. He does not look at the Sensex, but at his returns.

Let's say he buys 100 units of a mutual fund or the shares of a company. He then breaks them up into lots of 25 each.

When he makes a 20% profit on the investment, he sells the first lot.

The next lot of 25 is sold at a 25% appreciation.

As he keeps making a profit, he raises the stakes. The third set is sold at a 40% appreciation and the last lot at 50%.

In this way, if the price goes up after he sells his first lot, he still has shares to sell at a better profit.

If the price drops after he sells his first lot, at least he made a profit on a portion of his investment.

Of course, these are high parameters to have right now with the Sensex at 9000 levels. But you can apply the underlying principle to your strategy.

Maybe you can sell 50% of your investment now, 30% when the Sensex appreciates some more and 20% when you believe it has peaked.

What about buying now?

What if you sell your units or shares and don't know where to invest the profits?

If you are considering a mutual fund, check the performance of the fund over time. Are you happy with the way a particular fund manager manages his fund and the objective of the fund? If yes, consider investing in it.

The best way to buy mutual funds units at this point is to opt for a Systematic Investment Plan.

Decide how much of money you want to allocate every month and invest that in the mutual fund of your choice.

Depending on the Net Asset Value, you will get units assigned to you.

In this way, you end up buying units when the NAV is high and low. Over time, it evens out.

If you don't want to invest in a diversified equity fund, you can try a balanced fund which invests in shares and fixed return instruments.

When buying shares, look at it from a really long-term point of view.

Invest in stocks you truly believe in. Look at the fundamentals. Analyse the company and ask yourself if you want to be part of it.

If the market does crash, will you still be comfortable holding these shares? If yes, then buy.

Stay emotionless

This one is tough. Where money is concerned, it is difficult not to get greedy.

When that happens, no price is good enough. You will just keep waiting for price to go higher.

The reverse also works. Once you sell, don't look back in regret if the price keeps zooming. Be happy with your profit.