HOW ONE CAN GENERATE REGULAR INCOME FROM INVESTING IN MUTUAL FUND?

Looking for regular income from mutual funds?

India most popular instruments that can generate a regular income or can help someone withdraw money at regular intervals are:

• Post Office MIS (Monthly Income Scheme)
•  Fixed Deposit
• Senior citizen saving scheme
• Monthly Income Plan (MIP)
• SWP (Systematic Withdrawal plan)
• Dividend from Mutual funds
• Dividend from Equity
• Annuity from Insurance companies
• Rent from Real Estate
• Long term Government Bond

Retired people or people having no regular sources of earnings with an investable lump sum amount can earn regular income in different ways using mutual fund investment.

People who depend on different income schemes for regular income often don’t realize that their money is losing value due to inflation. Keeping this in mind, some of the alternatives that can be considered are monthly income plans (MIPs) and systematic withdrawal plan (SWP) in a debt mutual fund.

Monthly Income Plans (MIP)

MIP is a debt mutual fund scheme which invests a small part of the funds in equities. It offers regular income in the form of periodic (monthly, quarterly, half-yearly) dividend payouts. MIP returns can be volatile. At times, the scheme may suffer losses, making dividend payouts irregular - both in quantum and frequency. The scheme may, at times, not pay any dividend at all. In spite of this, MIPs of mutual funds can offer higher returns after adjusting for tax and hence can be a better option.

Example:

Let us consider a situation where a person invests Rs. 1lakh and opts for withdrawal of Rs 1,000 every month. If the MIP generates a 10% annual return, or 0.83% per month, Rs 830 out of Rs 1,000 will be paid from the scheme's profits and the balance, that is, Rs 170, from the capital.

Systematic withdrawal plan (SWP)

SWP is most effective way to generate regular income which many investors tend to forgo. If you have invested in equity or debt mutual funds you can generate regular monthly income from mutual funds by selecting Systematic withdrawal plan (SWP). SWP is a good option for those looking for income at fixed intervals, as SWP is a facility which allows investors to withdraw a specific amount of money from a mutual fund at regular intervals.

Most commonly, two options are available for SWP’s. The first option is a fixed amount withdrawn at fixed intervals that could be monthly, quarterly, yearly etc. and the second option is the appreciated amount withdrawn on a fixed interval.

Therefore, if one opts for a regular income investment plan, a systematic withdrawal plan is a superior alternative.

SWP in a debt mutual fund is tax effective. Although the dividend received in the hands of the investor is tax free, all non-equity investments attract DDT of 28.84%. The DDT is paid by the AMCs but eventually the investor has to pay. In a SWP, each withdrawal within 3 years from the date of purchase will be treated as a short-term capital gain. The gains will be added to the investor’s income and taxed accordingly. Withdrawal beyond 3 years from the date of purchase will attract long-term capital gains tax of 20%. But since the investor will enjoy indexation benefits, it is likely that investor is going to pay a lower amount of tax based on the indexed cost.

Monthly cash flow requirements and tax efficiency are two most significant factors that determine whether you should choose dividend or the SWP option or MIP option. To summarize, for fixed monthly income, MIP and SWPs are two options. Under both these choices investments are made in debt mutual funds. In the Monthly Income Plan the monthly income, however, is inconsistent because it depends on market conditions. Additionally as compared to SWP’s, MIP’s are less tax efficient. Therefore, if one opts for a regular income investment plan, a systematic withdrawal plan is a superior alternative.

You can use GIIS Financial tools or Our Android App  for Investment, tracking and Asset allocation planning. 

*Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.

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