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Concepts & Tutorials

Video: How To Park Your Money, Save 80% Tax & Also Generate Cash Flow!

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Capital-Mind-Video
Capitalmind speaks of a new way to allocate a lumpsum cash amount and recover interest from it, every month and pay 80% less tax compared to a Fixed Deposit!’
All you have to do is to withdraw from a “growth” liquid fund every month; take out only what is generated as interest – that is, whatever is extra above your invested amount.
This cash flow is substantially better than using a fixed deposit – and that is only because our tax laws give you the ability to reduce your tax outflow by classifying this as a capital gain.
The video explains how to do this and how the tax is much much lower than an equivalent fixed deposit, as much as 80% lower in terms of tax outflow!
And then, you can use the money to finance anything – even a trading portfolio! A Rs. 500,000 investment can generate about Rs. 2,500 per month (at 6% interest, you can get more now though). This money is your “stop loss” amount on any trade you do – and if you hit it, you don’t lose any money. You can buy a stock for Rs. 25,000 and keep a 10% stop loss. Net of the interest taken out, you don’t lose anything. If you make money, just add that to the 2,500 you have earned and it’s next month’s stop loss, and next month you’ll make another Rs. 2,500 to increase your ability to trade easily. Over time you will have built a good amount of trading capital as well!
For the spreadsheet, click here to download and view.

 

 

Comments & Suggestions are welcome!
If you have any questions regarding the topics discussed in the video, please use the comments section on Youtube to post your query.
Thanks & Have a great day!

 

  • Sachin says:

    The tax efficiency hold good on Systematic withdrawal , as long as you don’t withdraw the corpus ( if the corpus is redeemed post 3 years we have indexation benefits which is a given ).
    Let me explain :
    As explained , I am using the SWP ( systematic withdrawal plan) to generate cash from the liquid fund . I am investing 50 L to generate 25k /month . At the end of the year 1 , the NAV is 10.62 . And the tax outgo is 2994 rs for the 3L earned as interest .
    Now , l I intend to withdraw the entire corpus at the end of 1st year due to some exigency .
    At end on year 1 , NAV is 10.62 ( we bought it at 10) . Number of units left at end of year 1 is 473307.43.
    The tax we need to pay on withdrawal of the corpus from the fund is ( assuming the person is in 30 % slab)
    (10.62 – 10) * 473307.43 * 0.309 = 90600 rs.
    There is almost no difference in the tax outgo vis-a-vis the FD, If you withdraw the entire corpus money from the fund before 3 years .
    I think this point is missed in the preso. Please correct me if I am wrong .

    • Yes, the point of the presentation is to never attempt to withdraw the corpus at all, only the interest each month. If you do try to do the corpus then you will lose on the tax, that’s a given. But why would you do that? Only in an emergency. And then also, you never need to remove all the corpus, only what you need.

      • Sachin says:

        Yes , Read “incase of an exigency” 🙂
        You can consider adding this point as a disclaimer , A non-retiree may withdraw the money from the liquid fund anytime for a “down payment “of a house / holiday /new car etc etc 🙂

        • Thanks – good point 🙂 I would of course assume that this is not savings for an emergency (you need a separate fund for that, at least for the first three years), or for the payment of a house etc. Even in that case, your tax is just equal to an FD, not greater…

  • Sachin says:

    Ha! looks somebody already beat me into putting this comment about corpus taxation.
    Here an additional assumption is that liquid fund provides same CAGR as a FD, both assumed to provide 6%. However, the returns on liquid fund can be assumed to be marginally higher. This and indexation benefits are the real deal.

  • Sam says:

    The profits from liquid fund depicted in the sheet seem to have excluded expenses charged by MFs. It would be interesting to see what is the net benefit including those expenses.

  • siddhant says:

    seems wrong, why not go for arbitrage funds with monthly payout No tax & more payout average of 7% payout on yearly basis tax free in this route.

  • Oghma says:

    I enjoyed the video and thought that it iterated a concept that most of us intuitively come around to after a few years of playing around with a portfolio.
    What I found particularly interesting was the options strats that you were talking about in the latter part of the video. I have been trying– unsuccessfully, to include options trading in my repetoire for some time now. I was wondering if you could enlighten me on how one could traverse this steep learning curve. I have read a number of texts on options( Nateenberg, Cohen, etc) I am fairly good at picking stocks prefering to seek value through bottom-up selection. I learnt to invest in equity by actually doing it; this approach has proven rather expensive with regard to options, though.

    • We’ve been doing very interesting pieces in StratOptions in premium, where we write options and hedge out risks on a regular basis, to attempt to earn around 3% a month. Here texts aren’t as useful as just the math around decay and volatility. The idea is to trap time decay when volatility is high enough to be favourable, and to use chart levels to understand when to hedge. Options should not be used only as an instrument to go long; it’s better in our opinion to work with options to generate returns through analysis of decay and volatility. (Uncle Theta!)

  • Nitin says:

    What is the arbitrage here? In other words, what aspect of taxation/structuring allows this to happen?

  • Rahul Mehta says:

    Great video Deepak. How about I invest in Dividend option of Ultra Short term funds like HDFC Cash Management Fund or UTI Treasury Advantage and take out the dividend every month ? I understand DDT paid by the fund. Any comparison on Growth versus Dividend option return ? With indexation, after 3 years growth seems better option. But those with 3 year time duration, is dividend option better ?

    • If you know that your horizon is less than three years, then you might as well do an FD. Most people don’t know that and have no way to know either.
      DDT will eliminate all advantages, so no point doing dividend thingy. What’s the point of paying 30% tax at source when you can rather pay 10% tax at source instead.