The Hindu Business Line : PruICICI Income Multiplier: Hold

EXISTING investors in PruICICI Income Multiplier can retain their exposures. PruICICI Income Multiplier is predominantly a debt-oriented fund that can invest up to 30 per cent of its assets in equities.

Tax impact: There is a trade-off between rebalancing and taxes in the case of an investment in funds such as Income Multiplier or other MIPs. Rebalancing refers to realigning the proportion of equity and debt investments in a portfolio. In Income Multiplier, the fund manager would regularly ensure that equities stay at about 25 per cent of the portfolio.

In the case of investment in funds such as Income Multiplier, the investor need not rebalance between equity and debt since the fund manager does it for him. This rebalancing over a short-term of less than a year avoids taxes because of the mutual fund format. The downside is that the gains from redemption of units would suffer a tax of 10 per cent.

In contrast, if the investor had invested directly in equity and debt funds in a particular proportion, they have to rebalance on their own. In the short-term, this attracts taxes of 10 per cent. Gains after holding the funds for more than a year, however, are totally tax-free.

If the investor thinks there is no need to rebalance within a year and also intends to hold for a long-term then directly investing in equity and debt funds may make more sense. This is because the effect of the 10 per cent long-term capital gains tax on MIPs or funds such as Income Multiplier could prove substantial. If the investor, however, insists on rebalancing within a year funds such as Income Multiplier will make sense.

Performance: Performance of the fund since its launch in March 2004 has been impressive. Compared to a monthly income plan, this fund has delivered considerable value to investors. A MIP, which can typically invest up to 20 per cent of its assets in equities, has on an average gained about 10 per cent. In contrast, Income Multiplier has gained about 17 per cent.

A fund such as Templeton India Pension Plan, which can invest up to 40 per cent in equities, has also gained only about 17 per cent. The performance is, therefore, creditable.

Then why not invest fresh money? This fund has remained around for less than two years. It always makes sense to observe track record over a longer period before committing fresh money.

Besides, it might make sense to invest in a mix of balanced and debt funds to achieve the same mix of 30 per cent equity and 70 per cent debt. That might be more tax efficient although it would be inefficient in terms of rebalancing.

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