One of the problems faced by retired people is to
make their portfolio earn well so that the corpus lasts their entire lifetime.
There is a paradox inherent in that statement. If the portfolio has to earn
well, they would need to take some risk – which many seniors may not want to
take with their retirement corpus. But if they don’t do that, they run the real
risk of the corpus dwindling in their lifetime itself. A real Catch-22
situation!
So, is there any way out?
There is. This can help a person who does not want to
take too much risk but also wants to participate in market upsides and inject
some steroids into their portfolio. A low risk way of going about it is through
a Dividend Transfer Plan.
What is a Dividend Transfer Plan?
A Dividend Transfer Plan( DTP ) is one where the dividend
declared in a source scheme is transferred as an investment in a target scheme.
The advantage here is that the original investment is intact and only the
dividend declared is being transferred out. Hence, in this plan, there is
inherent capital protection.
How does it work in favour of a retired person?
Firstly, one needs to invest in an appropriate debt scheme.
That way one ensures that the capital erosion possibilities are minimized ( as it
is a debt scheme ). This is the source scheme. Next, there would be a target
scheme, which would be an equity scheme.
What kind of equity scheme one would want to invest would
depend on one’s propensity to take risk. Ideally, it is suggested that the target
scheme is a large cap oriented fund, an Index fund or hybrid scheme. These
schemes have comparatively lower risk profiles as against a midcap/ small cap/
thematic or sectoral funds. Hence, these schemes may be more suited for a
retired person.
When dividends from the debt scheme are transferred to an
equity scheme, only the dividend amount is exposed to the vagaries of the
market. However, the amounts that get transferred may be small in comparison
with the original investment and accretion to the equity fund would be slow.
This would work well over a long period, in which time the equity fund would
have got enough corpus through dividend transfers and due to the growth from
the funds already in the corpus.
By this process equity exposure can be built up without
jeopardizing the original investment amount.
How to go about it?
One needs to find out which debt schemes can one invest in,
from where dividends can be transferred out. Each AMC would have a list of
schemes from which DTP is available. Then one needs to identify a set of equity
schemes into which the dividends can go into. Once the DTP mandate has been
filled and submitted, it takes about a week to get activated. After that, the
dividends start to get transferred into the target equity scheme automatically.
One can stop this, if needed, anytime.
What are that tax implications?
If one is in the highest income bracket, dividend
distribution tax is 28%+ would be advantageous. In the lower income
slabs, the tax paid due to dividend distribution would be higher than the slab
they fall under. Hence, irrespective of whichever slab one falls in, the tax
paid by the AMC before distribution would be 28% plus, which depresses the
amount being transferred to the target scheme to that extent. This is one of
the downsides of this dividend transfer plan for those who may be in the lower
income tax slabs.
Overall, this Dividend Transfer Plan limits the downside risk
of capital erosion as well as helps in building a corpus of equity assets which
can potentially offer higher returns, to enable a person to get better
portfolio returns. This is a case of a Catch-22 situation being sorted out
beautifully. It’s something like having the cake & eating it too!
Author
: Suresh Sadagopan | Article published in Moneycontrol
www.ladder7.co.in
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