The new open-ended FMCG sector fund from Prudential ICICI deserves a close look in this context. The initial issue of the fund opened on 15 th of February and is set to close on 30 th of March. Committed to invest 90% of its corpus in FMCG sector, this fund offers an opportunity for investors to take an indirect exposure on the blue chip FMCG scrips such as Hindustan Lever, Cadburys, Britannia, Procter & Gamble, Nestle, etc. It is firmly believed that this sector is likely to maintain its growth rate in the current year at around 30 % or more. It will be interesting to follow the fund’s performance in comparison with the Kothari Pioneer’s FMCG fund, which is also running simultaneously. Investors may even choose to invest in both the funds and look for a switch to the fund, which may perform better in due course.

One of the distinguishing features of this fund is that it is providing a "Systematic Withdrawal Plan" for the investors. This unique scheme enables the investors to withdraw a specified amount every month from the scheme. The fund would buy back the corresponding number of units required for the purpose. This is similar to a scheme of "Annuity Deposits" that was prevalent in some banks in the recent past. Unlike the LIC plans where "Annuity" refers to annual repayment of the maturity proceeds, Banks have been offering an equated monthly payment scheme with the deposit amount being fully amortised over a chosen deposit period. The payment at monthly intervals of a predetermined amount renders the scheme attractive for investors who want to plan their disinvestments.

For example, if the rate of interest is 10 % pa compounded at quarterly intervals, a deposit of Rs 10000 for 60 months under this scheme may provide a monthly repayment of Rs 212 for 60 months. On the other hand the monthly interest payment under a normal fixed deposit may only be Rs 82.50 per month. The two payments are not strictly comparable, since the Annuity Deposit has no corpus at the end of the period while the fixed deposit corpus remains in tact. However the comparision indicates the potential of the annuity deposit scheme for enhancing the monthly cash flow and for being used as a "Scheme for Planned Spending".

After the recent drop in Bank interest rates, many of the retired persons who were living out of Interest income have seen significant erosion of their monthly income. Many of them are now forced to eat into the main corpus by not renewing a portion of their deposits. Such persons can shift a portion of their corpus into the "Systematic Withdrawal plan". At a notional earning of around 10 % pa they need to invest approximately Rs 4715 for every Rs 100 they plan to withdraw every month for 60 months. With a higher earning potential in the mutual fund, it may be enough to set aside around Rs 4000 for a payment of Rs 100 per month for 60 months .

Prudential ICICI scheme provides for a systematic withdrawal of a minimum of Rs 500 per month or multiples thereof. Since the rate of return in a mutual fund is not determinable in advance, it may not be possible to fix an exact quantum of amount to be set aside. Investors may target a certain return for a certain period based on the anticipated rate of return in the scheme. If the rate of return actually earned is lower than anticipated, the monthly payments may terminate earlier than the anticipated period of 60 months. On the other hand if it is higher, the payments continue for an extended term.

The scheme can also be used by persons who want to set aside a corpus for known expenses such as educational expenditure of their son or daughter.

While the scheme offers benefits such as tax free dividends which other mutual funds offer, the systematic withdrawal facility provides an innovative edge which can be used profitably by intelligent investors who not only plan their investments but also their expenses.

Na.Vijayashankar

(naavi@vsnl.com)

28th March 1999