FACT # 17
MFs have specified funds eligible for Income Tax deductions under Sec 80c, these are known as Tax Savers Fund. The amount invested is locked in for 3 years. In these funds the payout option should be taken as some money will keeps coming back as dividend during these 3years also. In the 4th year the same amount can be redeemed and invested back as fresh subscription for tax break.
FACT # 18
Banks have an approved list of MF on which loans can be taken. This category of loans is known as loan against security [LAS]. Under this arrangement 50% of the current NAV is available as loan limit. In an economy when MFs are giving 25% or more annualized returns, this is a very attractive source of money earning money.
FACT # 19
Banks have a provision of getting a loan agreement signed on stamp paper. One can save on the cost of the agreement by opting for Rs 10 lacs limit at the first instance itself. Additional MF units can be pledged as one goes along.
FACT # 20
I missed an opportunity to book profits during the present meltdown as my best earning units were pledged under LAS. My bank does not allow partial redemption of pledged units. My suggestion is to build ones portfolio with equal amount of units as not pledged of the same fund. This will allow selling of units not pledged once the market starts to fall and buying them back again once it stabilizes at a lower level.
FACT # 21
Under LAS just like loan limit goes up, so can it fall also. To safeguard ones interest under such an eventuality, a safety net has to be in place. This safety net should be in form of additional FDs with OD facility. When the LAS limit is falling the difference can be met by withdrawals under OD limits of the FD. Once the markets stabilize amounts should be withdrawn from LAS account and deposited back in the OD account. This additional OD facility should be used only as back up for LAS otherwise the safety net gets weak.
FACT # 22
During ones earning period this amount acts as safety net and after retirement it become a component of savings required for old age [see Financial Planning- Pension Funds]. This holds true for any safety net created as each net is loan specific but later on becomes part of the Pension Fund.
For the complete picture, I recommend you start with the first blog in this series; click here
For previous blog in the series; click here